there is another issue we need to cover related to form 1099C.
As you see in instruction who should file form 1099C - www.irs.gov/pub/irs-pdf/i1099ac.pdf
File Form 1099-C
if you are:
1.A financial institution described in section 581 or 591(a) (such as a domestic bank, trust company, building and loan or savings and loan association).
3.Any of the following, its successor, or subunit of one of the following:
Deposit Insurance Corporation,
b.Resolution Trust Corporation,
c.National Credit Union Administration
d.Any other federal executive agency, including government
e.Any military department,
f.U.S. Postal Service, or
4.A corporation that is a subsidiary of a financial institution or credit union, but only if, because of your affiliation, you are subject to supervision and examination by a federal or state regulatory agency.
5.A Federal Government agency including:
c.A court or court administrative office, or
d.An instrumentality in the judicial or legislative branch of the government.
6.Any organization whose significant trade or business is the lending of money, such as a finance company or credit card company (whether or not affiliated with a financial institution). The lending of money is a significant trade or business if money is lent on a regular and continuing basis. Regulations
section 1.6050P-2(b) lists three safe harbors under which reporting
may not be required for the current year.
As the trust most likely is not in any of these categories - that means - the form 1099C should not be issued by the trust.
There are penalties for failure to file correct information returns by the due date
and for failure to furnish correct payee statements. See part O in the 2013 General Instructions for Certain Information Returns for details. - www.irs.gov/pub/irs-pdf/i1099gi.pdf
As you see - the maximum penalty is $100 per information return filed incorrectly or late.
There are certain exceptions to the penalty - and based on your information the trust might qualify for the exception.
So penalty should not be a big issue for the trust, but reporting large taxable income does create a problem to the debtor.
Considering your information - you might want to re-classify the forgiven loan into distribution. You need to consult with your attorney if you as a trustee may do that.
Sorry if you expected a different answer.