seek legal counsel. the IRS says that the cancellation of a stockholder's debt should be reported on 1099-DIV (IRS PUB 542). this would result in the stockholder having taxable income but your LLC/corporation would get no deduction. since you are an LLC taxed as a C-Corp, I can't say whether or not the "principal" would be regarded as a shareholder under state law. a 1099-C seems inappropriate, you're not a financial institution, and actually might be subject to a fine for issuing it. an issue that could arise with the IRS is that they could deem it compensation. then they hit the corporation for various penalties for failure to report payroll and withhold taxes. Unlikely unless the principal took an active part in the operations.
