[Federal Register Volume 73, Number 218 (Monday, November 10, 2008)]
[Rules and Regulations]
[Pages 66539-66541]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-26676]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9430]
RIN 1545-BH99


Information Reporting for Discharges of Indebtedness

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
relating to information returns for cancellation of indebtedness by 
certain entities. The temporary regulations will avoid premature 
information reporting from certain businesses that are currently 
required to report and will reduce the number of information returns 
required to be filed. The temporary regulations will impact certain 
lenders who are currently required to file information returns under 
the existing regulations. The text of these temporary regulations also 
serves as the text of the proposed regulations as set forth in the 
Proposed Rules section in this issue of the Federal Register.

DATES: Effective Date: These regulations are effective on November 10, 
2008.
    Applicability Date: For dates of applicability, see Sec.  1.6050P-
1T(h).

FOR FURTHER INFORMATION CONTACT: Barbara Pettoni at (202) 622-4910 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under section 6050P relating to information reporting for 
cancellation of indebtedness by certain entities. The amendments will 
reduce the number of information reports required to be filed under 
section 6050P.
    In general, section 6050P requires certain entities to file 
information returns with the IRS, and to furnish information statements 
to debtors, reporting discharges of indebtedness of $600 or more. As 
originally enacted by the Omnibus Budget Reconciliation Act of 1993, 
Public Law 103-66 (107 Stat. 312, 531-532 (1993)), section 6050P 
applied solely to ``applicable financial entities,'' which was then 
defined to include only financial institutions, credit unions, and 
Federal executive agencies.
    In 1996, final regulations were published implementing section 
6050P. See TD 8654, 61 FR 262 (January 4, 1996) (the 1996 regulations). 
The 1996 regulations required applicable financial entities, as then 
defined, to issue Forms 1099-C, ``Cancellation of Debt,'' upon the 
occurrence of one of several ``identifiable events'' as provided in 
Sec.  1.6050P-1(b)(2)(i)(A) through (H). One of these identifiable 
events requiring the issuance of a Form 1099-C was the expiration of a 
``non-payment testing period'' pursuant to Sec.  1.6050P-1(b)(2)(i)(H). 
The 1996 regulations created a rebuttable presumption (the ``36-month 
rule'') under Sec.  1.6050P-1(b)(2)(iv) that this period expired if a 
creditor had not received a payment for 36 months. Section 1.6050P-
1(b)(2)(iv) provides that the presumption that an identifiable event 
occurred can be rebutted by a creditor if the creditor had engaged in 
significant, bona fide collection activity.
    After the issuance of the 1996 regulations, the Debt Collection 
Improvement Act of 1996, Public Law 104-134 (110 Stat. 1321, 368-369 
(1996)) (the 1996 Act), expanded section 6050P to cover any executive, 
judicial, or legislative agency (as defined in 31 U.S.C. 3701(a)(4)) as 
well as any applicable financial entity. The 1996 Act was effective 
April 26, 1996. The Ticket to Work and Work Incentives Improvement Act 
of 1999, Public Law 106-170 (113 Stat. 1860, 1931 (1999)) (the 1999 
Act), further expanded section 6050P by expanding the definition of 
``applicable financial entity'' to include any organization ``a 
significant trade or business of which is the lending of money.'' The 
1999 Act was effective for discharges of indebtedness occurring after 
December 31, 1999.
    In 2002, the IRS and the Treasury Department published proposed 
regulations to reflect the changes to section 6050P. See REG-107524-00, 
67 FR 40629 (June 13, 2002). The IRS received written (including 
electronic) comments on the proposed regulations and a public hearing 
was held on October 8, 2002. After consideration of the comments 
received, the IRS adopted the proposed regulations with amendments. See 
TD 9160, 69 FR 62181 (October 25, 2004) (the 2004 regulations). Section 
1.6050P-2 of the 2004 regulations describes the circumstances in which 
an organization has a significant trade or business of lending money, 
thereby triggering an information reporting requirement when it cancels 
debt.

Reasons for Change

    The 36-month rule of Sec.  1.6050P-1(b)(2)(iv) was drafted at a 
time when section 6050P applied only to financial institutions, credit 
unions, and Federal executive agencies and did not extend to any 
executive, judicial, or legislative agency or any organization ``a 
significant trade or business of which is the lending of money.'' Since 
the publication of the 2004 regulations, commenters have raised the 
concern that the application of the 36-month rule to entities with a 
significant trade or business of lending money might trigger a 
reporting requirement even when the entity has not legally or 
practically discharged the debt. The IRS and the Treasury Department 
agree that it is appropriate to limit the application of the 36-month 
rule to the entities for which it was originally intended in order to 
avoid premature information reporting of cancellation of indebtedness 
income. Doing so will reduce the information reporting burden on 
entities that were not originally within the scope of the 36-month rule 
and will protect debtors from receiving information returns that 
prematurely report cancellation of indebtedness income from such 
entities.
    The Treasury Department and IRS are still considering other 
comments received since the publication of the 2004 regulations, 
including a request to clarify the meaning of ``stated principal'' in 
Sec.  1.6050P-1(c) and (d)(3) when it is applied to those who acquire a 
loan from a person other than the debtor. Section 1.6050P-1(c) provides 
that ``indebtedness'' for purposes of section 6050P means any amount 
owed to an applicable entity, including stated principal, fees, stated 
interest, penalties, administrative costs, and fines. Section 1.6050P-
1(d)(3) further provides that, in the case of a lending transaction, 
the discharge of an amount other than stated principal is not required 
to be reported under section 6050P. Commenters have stated that it is

[[Page 66540]]

unclear whether the simplifying rule limiting an information report to 
the amount of stated principal can be applied to loan acquirers. 
Commenters have asserted that loan acquirers might know only the 
aggregate amount due on the loans they are purchasing, not the 
breakdown of that amount into principal and accrued interest or fees. 
Therefore, if loan acquirers discharge an aggregate amount, it is 
difficult for them to determine how much is required to be reported 
under section 6050P. The Treasury Department and IRS is considering 
issuing future guidance under section 6050P to address these concerns.

Explanation of Provisions

    The temporary regulations and amendments to existing regulations 
limit the application of the 36-month rule to the entities described in 
the 1993 Act. The temporary regulations avoid premature information 
reporting from certain entities that are currently required to report 
under section 6050P. Notwithstanding this limitation, the temporary 
regulations provide that, in the case of an entity previously subject 
to the 36-month rule that was required to file information returns in a 
tax year prior to 2008 due to application of the 36-month rule, and who 
failed to so file, the date of discharge is the first identifiable 
event, if any, described in Sec.  1.6050P-1(b)(2)(i)(A) through (G) 
that occurs after 2007. Thus, any entity previously subject to the 36-
month rule that has never filed an information return remains subject 
to the information reporting requirement upon the occurrence of any of 
the other identifiable events.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations.
    For the applicability of the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) refer to the Special Analyses section of the preamble to the 
cross-reference notice of proposed rulemaking published in the Proposed 
Rules section in this issue of the Federal Register. Pursuant to 
section 7805(f) of the Internal Revenue Code, these regulations have 
been submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Drafting Information

    The principal author of these temporary regulations is Barbara 
Pettoni, Office of Associate Chief Counsel (Procedure and 
Administration).

List of Subjects 26 CFR Part 1

    Income tax, Reporting and recordkeeping requirements.

Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.6050P-0 is amended as follows:
0
1. The introductory text is revised.
0
2. A new entry for Sec.  1.6050P-1(b)(2)(v) is added.
0
3. The entry for Sec.  1.6050P-1(h) is revised.
0
4. A new entry for Sec.  1.6050P-1T is added.
    The revisions and additions read as follows:


Sec.  1.6050P-0.  Table of contents.

    This section lists the major captions that appear in Sec.  1.6050P-
1, Sec.  1.6050P-1T, and Sec.  1.6050P-2.
* * * * *


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

    (b) * * *
    (2) * * *
    (v) [Reserved] For further guidance, see the entry for Sec.  
1.6050P-1T(b)(2)(v).
* * * * *
    (h) Effective/applicability date.
* * * * *


Sec.  1.6050P-1T  Information reporting for discharges of indebtedness 
by certain entities (temporary).

    (b) * * *
    (2) * * *
    (v) Special rule for certain entities required to file in a year 
prior to 2008.
* * * * *


0
Par. 3. Section 1.6050P-1 is amended as follows:
0
1. Paragraph (b)(2)(i)(H) and the heading for paragraph (h) are 
revised.
0
2. A new entry for (b)(2)(v) is added.
    The addition and revisions read as follows:


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

* * * * *
    (b) * * *
    (2) * * *
    (i) * * *
    (H) [Reserved]. For further guidance, see Sec.  1.6050P-
1T(b)(2)(i)(H).
* * * * *
    (v) [Reserved]. For further guidance, see Sec.  1.6050P-
1T(b)(2)(v).
* * * * *
    (h) Effective/applicability date. * * *


0
Par. 4. Section 1.6050P-1T is added to read as follows:


Sec.  1.6050P-1T  Information reporting for discharges of indebtedness 
by certain entities (temporary).

    (a) through (b)(2)(i)(G) [Reserved]. For further guidance, see 
1.6050P-1(a) through (b)(2)(i)(G).
    (H) In the case of an entity described in section 6050P(c)(2)(A) 
through (C), the expiration of the non-payment testing period, as 
described in Sec.  1.6050P-1(b)(2)(iv).
    (b)(2)(ii) through (iv) [Reserved]. For further guidance, see Sec.  
1.6050P-1(b)(2)(ii) through (iv).
    (v) Special rule for certain entities required to file in a year 
prior to 2008. In the case of an entity described in section 
6050P(c)(1)(A) or (c)(2)(D) required to file an information return in a 
tax year prior to 2008 due to an identifiable event described in 
paragraph (b)(2)(i)(H), and who failed to so file, the date of 
discharge is the first event, if any, described in paragraphs 
(b)(2)(i)(A) through (G) of this section that occurs after 2007.
    (b)(3) through (g) [Reserved]. For further guidance see Sec.  
1.6050P-1(b)(3) through (g).
    (h) Effective/applicability date--(1) In general. The rules in this 
section apply to discharges of indebtedness after December 21, 1996, 
except paragraphs (e)(1) and (e)(3) of this section, which apply to 
discharges of indebtedness after December 31, 1994, except paragraph 
(e)(5) of this section, which applies to discharges of indebtedness 
occurring after December 31, 2004, and except paragraphs (b)(2)(i)(H) 
and (b)(2)(v) of this section, which apply to discharges of 
indebtedness occurring after November 10, 2008.
    (2) [Reserved]. For further guidance, see Sec.  1.6050P-1(h)(2).
    (i) Expiration date. The applicability of this section will expire 
on or before November 7, 2011.


[[Page 66541]]


    Approved: October 28, 2008.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
Eric Solomon,
 Assistant Secretary of the Treasury (Tax Policy).
 [FR Doc. E8-26676 Filed 11-7-08; 8:45 am]
BILLING CODE 4830-01-P