[Federal Register Volume 67, Number 114 (Thursday, June 13, 2002)]
[Proposed Rules]
[Pages 40629-40632]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-14825]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-107524-00]
RIN 1545-AY35


Guidance Under Section 6050P Regarding Cancellation of 
Indebtedness

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to the 
information reporting requirement under section 6050P of the Internal 
Revenue Code (Code) for cancellation of indebtedness. The proposed 
regulations reflect the enactment of section 6050P(c)(2)(D) by the 
Ticket to Work and Work Incentives Improvement Act of 1999. Section 
6050P(c)(2)(D) requires organizations a significant trade or business 
of which is the lending of money to report discharges of indebtedness. 
The proposed regulations also conform the existing regulations to 
statutory changes made by the Debt Collection Improvement Act of 1996. 
In addition, under the proposed regulations, if an organization that is 
required to report under section 6050P (an applicable entity) forms, or 
avails itself of, some other entity for the principal purpose of 
holding loans acquired by the applicable entity, then, for purposes of 
section 6050P, the entity so formed or availed of is treated as having 
a significant trade or business of lending money. This document also 
provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by September 17, 
2002. Requests to speak (with outlines of oral comments) at a public 
hearing scheduled for October 8, 2002, at 10 a.m., must be received by 
September 17, 2002.

ADDRESSES: Send submissions to: CC:ITA:RU (REG-107524-00), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand delivered Monday through Friday 
between the hours of 8 a.m. and 5 p.m. to: CC:ITA:RU (REG-107524-00), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit comments 
electronically directly to the IRS Internet site at: www.irs.gov/regs. 
The public hearing will be held in Room 4718, Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Donna J. Welch, at (202) 622-4910; concerning submissions and delivery 
of comments, and the hearing, Treena Garrett, at (202) 622-7190 (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) defining an organization a significant 
trade or business of which is the lending of money under section 
6050P(c)(2)(D). Section 6050P(c)(2)(D) was enacted by section 553(a) of 
the Ticket to Work and Work Incentives Improvement Act of 1999, Public 
Law 106-170, 113 Stat. 1860, 1931 (1999) (``the Act''), effective for 
discharges of indebtedness occurring after December 31, 1999. 
Generally, section 6050P(a) requires organizations that are subject to 
that section (applicable entities) to file returns with the Service and 
to provide statements to persons whose names are required to be shown 
on the returns (``payees''), setting forth certain information 
regarding discharges of indebtedness of $600 or more. Section 553(a) of 
the Act amended section 6050P of the Code by expanding the types of 
entities that are required to report discharges of indebtedness to 
include any organization ``a significant trade or business of which is 
the lending of money.'' Notice 2000-22, 2000-16 I.R.B. 902, April 17, 
2000, provides that penalties under sections 6721 and 6722 will not be 
imposed on the lending organizations newly required to report 
discharges of indebtedness for failures to report discharges of 
indebtedness occurring before January 1, 2001. In addition, Notice 
2001-8, 2001-4 I.R.B. 374, January 22, 2001, extended that suspension 
of penalties for failures to file information returns for any discharge 
of indebtedness that occurs prior to the first calendar year beginning 
at least two months after the date that appropriate guidance is issued.
    This document also contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) conforming the existing regulations under 
section 6050P to statutory changes made by the Debt Collection 
Improvement Act of 1996.

Explanation of Provisions

    Under section 6050P(c)(2)(D), any organization ``a significant 
trade or business of which is the lending of money'' is required to 
report discharges of indebtedness. These proposed regulations provide 
guidance on when a trade or business is the lending of money and when 
that trade or business is significant. In general, the proposed 
regulations provide that the lending of money is a significant trade or 
business if money is lent on a regular and continuing basis. The 
regulations provide three safe harbors under which organizations will 
not be considered to have a significant trade or business of lending 
money. The IRS and the Treasury Department believe that these safe 
harbors satisfy the information reporting objectives of the statute 
while minimizing the administrative burden on taxpayers.
    The first safe harbor applies to organizations that were not 
required to report under section 6050P in the previous calendar year. 
Such an organization will be considered not to have a significant trade 
or business of lending money for the calendar year if its gross income 
from lending money in the most recent test year (the most recent 
taxable year ending before July 1 of the previous calendar year) is 
less than both 15 percent of the organization's gross income and $5 
million.
    The second safe harbor applies to organizations that were required 
to report under section 6050P for the previous calendar year. Such an 
organization will be considered not to have a significant trade or 
business of lending money for the calendar year if, for each of the 
three most recent test years, its gross income from lending money is 
less than both 10 percent of the organization's gross income and $3

[[Page 40630]]

million. The IRS and the Treasury Department believe that a stricter 
safe harbor is appropriate for taxpayers that have been subject to 
section 6050P in a prior year and, therefore, presumably have systems 
in place to comply with the information reporting requirements of the 
statute.
    The third safe harbor applies to certain newly formed 
organizations. Except for an entity that is formed or availed of for 
the principal purpose of holding loans acquired by an applicable entity 
(as defined in section 6050P), an organization that does not have a 
test year is considered not to have a significant trade or business of 
lending money even if the organization lends money on a regular and 
continuing basis. This safe harbor and the use of a ``test year'' in 
determining whether a taxpayer fits within the other safe harbors 
provides taxpayers with some advance notice (i.e., at least six months) 
of whether they will need to establish systems to track and report 
discharges of indebtedness.
    In addition to the safe harbors discussed above, the proposed 
regulations provide a general exception to information reporting for 
entities whose principal trade or business is the sale of nonfinancial 
goods or the provision of nonfinancial services. Such entities are not 
considered to have a significant trade or business of lending money 
with respect to lending or credit extended in connection with the 
purchase by customers of those goods and services. This is consistent 
with the legislative history, which indicates that, in amending section 
6050P, Congress was concerned with credit card and finance companies. 
S. Rpt. No. 201, 106th Cong., 1st Sess. 28 (1999). The IRS and the 
Treasury Department believe that Congress did not mean to extend the 
reporting requirement to retailers and other entities who extend credit 
to customers in connection with the purchase of nonfinancial goods and 
services. However, consistent with applying the tests under section 
6050P on an entity-by-entity basis, this exception is not available to 
a separate financing subsidiary of such a retailer. In addition, if 
such a retailer is subject to section 6050P regardless of its accounts 
receivable, it is required to report discharges of indebtedness of 
accounts receivable as well as other debt.
    The proposed regulations also provide that, for purposes of section 
6050P(c)(2)(D), lending money includes acquiring a loan, and gross 
income arising from that loan is gross income from lending money. 
Therefore, an organization that buys and holds loans is treated as an 
organization that lends money. This is consistent with the temporary 
regulations under section 6050J (relating to information returns for 
acquisitions and abandonments of property that is security for 
indebtedness). See Sec. 1.6050J-1T, Q&A-22.
    Finally, the proposed regulations amend Sec. 1.6050P-1 to provide a 
new rule applicable to all entities subject to section 6050P, not just 
those newly made subject to section 6050P by the 1999 amendment. The 
current regulations under section 6050P (Sec. 1.6050P-1(e)(2)) contain 
rules respecting the reporting requirements of debtors when 
indebtedness is owned by more than one creditor. Each creditor that is 
an applicable entity is required to report with respect to any 
discharge of indebtedness of $600 or more allocable to that creditor. 
For purposes of this rule, indebtedness owned by a partnership is 
treated as owned by the partners, with the result that reporting may be 
required of the partners with respect to a cancellation of debt held by 
the partnership. Rules respecting compliance with this pass-through 
reporting requirement by holders of interests in certain pass-through 
securitized indebtedness arrangements and REMICs were reserved. 
Sec. 1.6050P-1(e)(2)(iii) & (iv). The preamble to those regulations 
states that penalties will not be imposed for nonreporting by holders 
of interests in these entities.
    Conceivably, an entity that otherwise would be required to report 
under section 6050P with respect to its debt (for example, an entity 
that regularly and continuously lends money and does not meet the safe 
harbors of these proposed regulations), could transfer debt that it 
originates to a special purpose subsidiary or trust in a single 
transaction. Through this structure, the originator could possibly 
avoid application of section 6050P by arguing that the reservation of 
rules in the regulations for pass-through securitized indebtedness 
arrangements absolves them of any reporting obligation and that the 
transferee entity does not meet the requirements of regular and 
continuous lending activity.
    To address the foregoing concern, the amendment to Sec. 1.6050P-1 
by the proposed regulations provides that an entity formed or availed 
of by an applicable entity for the principal purpose of holding loans 
acquired or originated by the applicable entity is treated as having a 
significant trade or business of lending money. Accordingly, the 
transferee entity itself is treated as an applicable entity for 
purposes of section 6050P (c)(2)(D). If the entity formed or availed of 
by the applicable entity is a REMIC or a pass-through securitized 
indebtedness arrangement as defined in Sec. 1.6050P-1(e)(2)(iii)(B), 
the REMIC or pass-through securitized indebtedness arrangement will be 
treated as an applicable entity for purposes of section 6050P(c)(2)(D), 
despite the reservation in Sec. 1.6050P-1(e)(2)(iii) and (iv) of the 
application of section 6050P to holders of interests in REMICs and 
pass-through securitized indebtedness arrangements.

Proposed Effective Date

    The regulations, as proposed, apply to any discharge of 
indebtedness occurring in any calendar year beginning at least two 
months after the date that the final regulations are published in the 
Federal Register. Regardless of when the final regulations are made 
effective, the rules in these proposed regulations may be relied on for 
prior taxable periods.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
the regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. The information collection referenced in this proposed rule 
(Form 1099-C) has been previously reviewed and approved by the Office 
of Management and Budget under OMB Control Number 1545-1424. An agency 
may not collect or sponsor the collection of information unless it 
displays a valid OMB Control Number. Pursuant to section 7805(f) of the 
Code, this notice of proposed rulemaking will be submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any electronic or written comments (a 
signed original and eight (8) copies) that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on the clarity of 
the proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for October 8, 2002, beginning 
at 10 a.m.

[[Page 40631]]

in Room 4718 of the Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC. Because of access restrictions, visitors 
must enter at the main entrance, located at 1111 Constitution Avenue, 
NW. All visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT portion of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments must submit electronic or written 
comments and an outline of the topic to be discussed and time to be 
devoted to each topic (preferably a signed original and eight (8) 
copies) by September 17, 2002. A period of 10 minutes will be allotted 
to each person for making comments. An agenda showing the scheduling of 
the speakers will be prepared after the deadline for receiving outlines 
has passed. Copies of the agenda will be available free of charge at 
the hearing.

Drafting Information

    The principal author of these proposed regulations is Sharon L. 
Hall, Office of Associate Chief Counsel (Income Tax & Accounting). 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendment to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.6050P-1 and 1.6050P-2 also issued under 26 U.S.C. 
6050P. * * *

    Par. 2. Section 1.6050P-0 is amended as follows:
    1. The introductory text is amended by adding the language ``and 
Sec. 1.6050P-2'' immediately after the language ``Sec. 1.6050P-1''.
    2. The heading for Sec. 1.6050P-1 is amended by removing the word 
``financial''.
    3. The entry for Sec. 1.6050P-1(e)(2)(v) is added.
    4. The entries for Secs. 1.6050P-1(e)(5) through (e)(8) are 
redesignated as entries for Secs. 1.6050P-1(e)(6) through (e)(9) and a 
new entry for Sec. 1.6050P-1(e)(5) is added.
    5. The entries for Sec. 1.6050P-2 are added.
    The additions read as follows:


Sec. 1.6050P-0  Table of contents.

* * * * *


Sec. 1.6050P-1  Information reporting for discharges of indebtedness 
for certain entities.

* * * * *
    (e) * * *
    (2) * * *
    (v) No double reporting.
* * * * *
    (5) Entity formed or availed of to hold indebtedness.
* * * * *


Sec. 1.6050P-2  Organizations a significant trade or business of which 
is the lending of money.

    (a) In general.
    (b) Safe harbors.
    (1) Organizations not subject to section 6050P in the previous 
calendar year.
    (2) Safe harbor for organizations that were subject to section 
6050P in the previous calendar year.
    (3) No test year.
    (c) Seller financing.
    (d) Gross income from lending of money.
    (e) Acquisition of indebtedness by subsequent holder.
    (f) Test year.
    (g) Predecessor organization.
    (h) Examples.
    (i) Effective date.
    Par. 3. Section 1.6050P-1 is amended as follows:
    1. The heading for Sec. 1.6050P-1 is amended by removing the word 
``financial''.
    2. Paragraphs (a)(1), (b)(2)(i)(F), (c), (e)(2)(i), (e)(3), (e)(7), 
(f)(1) introductory text, (f)(1)(ii) and (f)(2) are amended by removing 
the word ``financial''.
    3. The first sentence of paragraph (c) is amended by adding ``and 
section 1.6050P-2'' immediately after the word ``section''.
    4. Paragraph (e)(2)(v) is added.
    5. Paragraph (e)(4) is amended by removing ``6050P(c)(1)(A)'' each 
time it appears and adding ``6050P(c)(2)(A)'' in its place and by 
removing ``6050P(c)(1)(C)'' and adding ``6050P(c)(2)(C)'' in its place.
    6. Paragraphs (e)(5) through (e)(8) are redesignated as paragraphs 
(e)(6) through (e)(9) and a new paragraph (e)(5) is added.
    7. Paragraph (e)(7)(i), as redesignated, is amended by removing 
``(e)(6)'' where it appears and adding ``(e)(7)'' and paragraph 
(e)(7)(ii), as redesignated, is amended by removing ``(e)(6)(i)'' where 
it appears and adding ``(e)(7)(i)'' in its place.
    8. Paragraph (h)(1) is amended by adding ``and except paragraph 
(e)(5) of this section, which applies to discharges of indebtedness 
occurring in any calendar year beginning at least two months after the 
date that the final regulations are published in the Federal 
Register.'', immediately after the language ``1994''.
    The additions read as follows:


Sec. 1.6050P-1  Information reporting for discharges of indebtedness by 
certain entities.

* * * * *
    (e) * * *
    (2) * * *
    (v) No double reporting. If multiple creditors are considered to 
hold interests in an indebtedness under paragraph (e)(2) of this 
section, and an entity is required to report a discharge of that 
indebtedness under paragraph (e)(5) of this section, then such multiple 
creditors are not required to report the discharge of indebtedness.
* * * * *
    (5) Entity formed or availed of to hold indebtedness. 
Notwithstanding Sec. 1.6050P-2(b)(3), if an entity (the transferee 
entity) is formed or availed of by an applicable entity (within the 
meaning of section 6050P(c)(1)) for the principal purpose of holding 
indebtedness acquired (including originated) by the applicable entity, 
then, for purposes of section 6050P(c)(2)(D), the transferee entity has 
a significant trade or business of lending money.
* * * * *
    Par. 4. A new Sec. 1.6050P-2 is added as follows:


Sec. 1.6050P-2  Organization a significant trade or business of which 
is the lending of money.

    (a) In general. For purposes of section 6050P(c)(2)(D), the lending 
of money is a significant trade or business of an organization in a 
calendar year if the organization lends money on a regular and 
continuing basis during the calendar year.
    (b) Safe harbors--(1) Organizations not subject to section 6050P in 
the previous calendar year. For an organization that was not required 
to report under section 6050P in the previous calendar year, the 
lending of

[[Page 40632]]

money will not be treated as a significant trade or business for the 
calendar year in which the lending occurs if gross income from lending 
money in the organization's most recent test year (as defined in 
paragraph (f) of this section) is both less than $5 million and less 
than 15 percent of the organization's gross income for that test year.
    (2) Organizations that were subject to section 6050P in the 
previous calendar year. For an organization that was required to report 
under section 6050P for the previous calendar year, the lending of 
money will not be treated as a significant trade or business for the 
calendar year in which the lending occurs if gross income from lending 
money in each of the organization's three most recent test years is 
both less than $3 million and less than 10 percent of the 
organization's gross income for that test year.
    (3) No test year. The lending of money will not be treated as a 
significant trade or business for an organization for the calendar year 
in which the lending occurs if the organization does not have a test 
year for that calendar year.
    (c) Seller financing. If the principal trade or business of an 
organization is selling nonfinancial goods or providing nonfinancial 
services and if the organization extends credit to the purchasers of 
those goods or services in order to finance the purchases, then, for 
purposes of section 6050P(c)(2)(D), these extensions of credit are not 
a significant trade or business of lending money.
    (d) Gross income from lending of money. For purposes of this 
section, gross income from lending of money includes income from 
interest, fees, penalties, merchant discount, interchange and gains 
arising from the sale of an indebtedness.
    (e) Acquisition of indebtedness by subsequent holder. For purposes 
of this section, lending money includes acquiring an indebtedness, and 
gross income arising from such an acquired indebtedness is treated as 
gross income from lending money, without regard to whether the 
indebtedness was originated by either an applicable entity or a related 
party.
    (f) Test year. For any calendar year, a test year is a taxable year 
of the organization that ends before July 1 of the previous calendar 
year.
    (g) Predecessor organization. If an organization acquires 
substantially all of the property that was used in a trade or business 
of some other organization (the predecessor) (including when two or 
more corporations are parties to a merger agreement under which the 
surviving corporation becomes the owner of all the assets and assumes 
all the liabilities of the absorbed corporations(s)) or was used in a 
separate unit of the predecessor, then whether the organization at 
issue qualifies for one of the safe harbors in paragraph (b) of this 
section is determined by also taking into account the test years, 
reporting obligations, and gross income of the predecessor.
    (h) Examples. The rules of this section are illustrated by the 
following examples.

    Example 1. Finance Company A, a calendar year taxpayer, was 
formed in Year 1 as a non-bank subsidiary of Manufacturing Company 
and has no predecessor. A lends money to purchasers of Manufacturing 
Company's products on a regular and continuing basis to finance the 
purchase of those products. A's gross income from interest in Year 1 
is $4.7 million. A's gross income from fees and penalties related to 
the lending activity in Year 1 is $.5 million. Section 6050P does 
not require A to report discharges of indebtedness occurring in 
Years 1 or 2, because A has no test year for those years. 
Notwithstanding that A lends money in those years on a regular and 
continuing basis, under paragraph (b)(3) of this section, A does not 
have a significant trade or business of lending money in those years 
for purposes of section 6050P(c)(2)(D). However, for Year 3, A's 
test year is Year 1. A's gross income from lending in Year 1 is not 
less than $5 million for purposes of the applicable safe harbor of 
paragraph (b)(1) of this section. Because A lends money on a regular 
and continuing basis and does not meet the applicable safe harbor, 
section 6050P requires A to report discharges of indebtedness 
occurring in Year 3.
    Example 2. The facts are the same as in Example 1, except that A 
is a division of Manufacturing Company, rather than a separate 
subsidiary. Manufacturing Company's principal activity is the 
manufacture and sale of non-financial products, and other than 
financing the purchase of those products Manufacturing Company does 
not extend credit or otherwise lend money. Accordingly, under 
paragraph (c) of this section, that financing activity is not a 
significant trade or business of lending money for purposes of 
section 6050P(c)(2)(D), and section 6050P does not require 
Manufacturing Company to report discharges of indebtedness.
    Example 3. Company B, a calendar year taxpayer, is formed in 
Year 1. B has no predecessor and a part of its activities consists 
of the lending of money. B packages and sells part of the 
indebtedness it originates and holds the remainder. B is engaged in 
these activities on a regular and continuing basis. For Year 1, B's 
gross income from sales of the indebtedness, combined with interest 
income, fees, and penalties related to the lending activity is only 
$4.8 million, but it is 16% of B's gross income in Year 1. Because B 
lends money on a regular and continuing basis and does not meet the 
applicable safe harbor of paragraph (b)(1) of this section, section 
6050P requires B to report discharges of indebtedness occurring in 
Year 3. B is not required to report discharges of indebtedness in 
years 1 and 2 because B has no test year for years 1 and 2.
     Example 4. The facts are the same as in Example 3. In addition, 
in each of Years 2, 3, and 4, B's gross income from sales of the 
indebtedness combined with interest income, fees, and penalties 
related to the lending activity is less than both $3 million and 10% 
of B's gross income. Because B was required to report under section 
6050P for Year 3, the applicable safe harbor for Year 4 is paragraph 
(b)(2) of this section, which is satisfied only if B's gross income 
from lending activities for each of the three most recent test years 
is less than both $3 million and 10% of B's gross income. For Year 
4, even though B has only two test years, B's gross income in one of 
those test years, Year 1, causes B to fail to meet this safe harbor. 
Accordingly, B is required to report discharges of indebtedness 
under section 6050P in Year 4. For Year 5, B's three most recent 
test years are Years 1, 2, and 3. However, B's gross income from 
lending activities in Year 1 is not less than $3 million and 10% of 
B's gross income. Accordingly, section 6050P requires B to report 
discharges of indebtedness in Year 5. For Year 6, B satisfies the 
applicable safe harbor requirements of paragraph (b)(2) for each of 
the three most recent test years (Years 2, 3, and 4). Therefore, 
section 6050P does not require B to report discharges of 
indebtedness in Year 6. Because B is not required to report for Year 
6, the applicable safe harbor for Year 7 is the one contained in 
paragraph (b)(1) of this section, and thus the only relevant test 
year is year 5.

    (i) Effective date. This section is effective for discharges of 
indebtedness occurring in any calendar year beginning at least two 
months after the date that the final regulations are published in the 
Federal Register.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 02-14825 Filed 6-12-02; 8:45 am]
BILLING CODE 4830-01-P