If I understand your question correctly, there was a loan to purchase the car (the person did not pay "all cash" for it). When the car was repossessed, the loan was, in effect, forgiven.
Many people don't realize that forgiveness of a debt is treated the same as income for tax purposes. I presume the 1099 was for an amount equal to the unpaid loan on the car.
Circular 230 Disclosure: Pursuant to IRS Regulations, we must inform you that any federal tax information, advice or recommendations contained in this communication [including attachments] a) is not intended and cannot be used or relied upon to avoid IRS imposed penalties or to promote, market or advise any other person(s) of such information, and, b) this communication is intended only for the taxpayer(s) to whom it is directed and may not be used to promote, market or recommend to another party any transaction or matter addressed herein.
Unfortunately, I see this situation too often. Many taxpayers will incur a tax liability because they are unaware that the IRS may treat forgiveness of debt as income. The taxpayer will file the return excluding the forgiveness of debt. Years later the IRS will conduct an additional tax assessment and determine a liability is due because taxes were not paid on the unforgiven amount. You should probably start hearing a lot more about this issue due to the foreclosure crisis.
If you do not make payments you owe on a loan secured by property (i.e. an automobile), the lender may repossess the property. The repossession is treated the same as a sale or exchange from which you may realize gain or loss. This gain or loss is treated as a gain or loss even if you voluntarily return the property to the lender. You figure and report gain or loss from a repossession in the same way as gain or loss from a sale or exchange. The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized.
You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property and the lender is not going to pursue its collection. If property that is repossessed secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the fair market value of the property. This income is separate and in addition from any gain or loss realized from the repossession.
For more information, examples, and a worksheet for the calculation of taxes on repossessed property, please see the attached.