Pratical advice on current issues: IRS finalizes regs. on reporting for discharges of indebtedness.

• Author: Fox, George

The IRS has issued final regulations (T.D. 9461) on information returns for cancellation of indebtedness by certain entities under Sec. 6050P. The final regulations, which were effective September 17, 2009, adopt 2008 proposed regulations without substantive change.

The final regulations limit application of the 36-month, nonpayment testing period (one of eight identifiable events triggering the Form 1099-C, Cancellation of Debt, information reporting requirements) to "applicable financial entities." These include financial institutions, credit unions, and certain of their federally supervised affiliates, as well as the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, the National Credit Union Administration, and other specified federal executive agencies. This group has been required to report cancellations of debt since Sec. 6050P was initially enacted in 1993. Other lenders that were later added and made subject to the Form 1099-C reporting requirements are no longer required to report when the 36-month nonpayment period is met.

Background

Sec. 6050P generally 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.

Regulations issued in 1996 required applicable financial entities, as then defined in Sec. 6050P, to issue Form 1099-C on the occurrence of any one of eight "identifiable events" listed in the regulation. One of those identifiable events involves the expiration of a "non-payment testing period," creating a presumption, absent a showing of significant, bona fide collection activity, that the loan was discharged, thus triggering the filing of a Form 1099-C when a creditor had not received a payment from the debtor for 36 months (the 36-month rule).

Following the issuance of the 1996 regulations, the Debt Collection Improvement Act of 1996, P.L. 104-134, subsequently expanded the scope of eligible persons required to file Form 1099-C to include any executive, judicial, or legislative agency. The Ticket to Work and Work Incentives Improvement Act of 1999, P.L. 106-170, further expanded the category of persons subject to the reporting requirements by expanding the definition of applicable financial entity to include "any organization a significant trade or business of which is the lending of money."

In 2008, temporary and proposed regulations (T.D. 9430; REG-118327-08) were issued limiting...