The Internal Revenue Service recently proposed very well-received regulations under Section 6050P of the Internal Revenue Code (the Code) that would eliminate the requirement for financial entities to treat debt as canceled after 36 months of non-payment for information reporting purposes.

Under the Code, an applicable financial entity (i.e., a (i) financial institution as defined in Code Sections 581 and 591(a) – including a domestic bank, trust company, building and loan or savings and loan association, but not including a REMIC, (ii) credit union, or (iii) Federal executive agency) that discharges (in whole or in part) indebtedness of a debtor in the amount of $600 or more during a calendar year must file an IRS Form 1099-C reporting the amount discharged to the debtor and to the IRS. Under Code Section 6050P and the current regulations, a financial entity’s obligation to file an IRS Form 1099-C is triggered when any of eight identifiable events occur. Seven of these events result in the actual discharge of debt.

However, the eighth event is a rebuttable presumption that 36 months without any payment on the debt by the debtor causes a discharge of the debt. A financial entity can rebut this presumption only by showing that it is undertaking significant, bona fide collection activity or other facts and circumstances that indicate the debt has not been discharged. The possibility that the presumption could be rebutted led to confusion about whether a debtor must report the amount shown on the IRS Form 1099-C as income.

In the preamble to the proposed regulations, the Treasury Department and the IRS stated that the reporting requirements under Code Section 6050P should coincide with an actual discharge of debt to the greatest extent possible. If the new regulations are adopted in their current form, a financial institution will be required to report discharge of debt only upon the occurrence of one of the seven remaining identifiable events, all of which relate to the actual discharge of debt. The regulations are proposed to become effective the date they are published as final regulations in the Federal Register.

For questions about the proposed regulations or about other IRS information reporting requirements, please contact Wendi L. Kotzen at 215.864.8305 or, Wayne R. Strasbaugh at 215.864.8328 or or another member of Ballard Spahr's Tax Group. 

Copyright © 2014 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

Related Practice