The current status of reporting discharge of indebtedness income.

• Author: Ames, Joanne D.

Regulations

In December 1993, the IRS issued temporary regulations under Sec. 6050P (TD 8506) relating to the reporting of discharges of indebt edness of $600 or more during the calendar year. The regulations apply to discharges occurring after Dec. 31, 1993, and a new form, Form 1099-C, Cancellation of Debt, has been released--to report the collected information.

The regulations provide that indebtedness is considered discharged on the occurrence of an identifiable event (such as bankruptcy), passage of the statute of limitations SOL) or a binding agreement indicating that the indebtedness will never have to be paid by the debtor. Indebtedness is the amount owed to the lender, including principal, interest, penalties, administrative costs and fines.

Notice modifies regulations

In July 1994, the Service released Notice 94-73, which provides that the IRS will not impose penalties for certain failures that occur before the later of Jan. 1, 1995 or the effective date of the final regulations under Sec. 6050P. No penalties will be assessed in 1994 for the failure to report discharges related to the expiration of the SOL and bankruptcy proceedings. This administrative relief recognizes the difficulty that financial institutions may have in designing systems to determine and track each state's SOL period. This relief also recognizes that financial institutions may not have the information to report bankruptcies, since the debt owed to the financial institution may not be included in the bankruptcy proceeding and there is no assurance that the financial institution will receive a copy of the bankruptcy notice. However, discharges related to agreements between the creditor and debtor are required to be reported in 1994 on Form 1099-C.

Only the principal amount related to a lending transaction is required to be reported on Form 1099-C. A lending transaction is defined as any transaction in which the lender extends credit, including revolving credit (e.g., credit cards). It is anticipated that the final regulations will clarify what portion of the discharge, in addition to the principal balance, must be reported. In general, the bank's loan, credit card or deposit account agreement will control as to whether the waiver or assessment of a fee is income to the borrower. To be reportable, the item must be income to the borrower under Sec. 61 (a)(1 2). The waiver of fees, in general, is not income when charged for a particular service.

When issuing a...