[Federal Register Volume 79, Number 199 (Wednesday, October 15, 2014)]
[Proposed Rules]
[Pages 61791-61794]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-24392]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-136676-13]
RIN 1545-BM01


Removal of the 36-Month Non-Payment Testing Period Rule

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that will remove a 
rule that a deemed discharge of indebtedness for which a Form 1099-C, 
``Cancellation of Debt,'' must be filed occurs at the expiration of a 
36-month non-payment testing period. The Department of the Treasury and 
the IRS are concerned that the rule creates confusion for taxpayers and 
does not increase tax compliance by debtors or provide the IRS with 
valuable third-party information that may be used to ensure taxpayer 
compliance. The proposed regulations will affect certain financial 
institutions and governmental entities.

DATES: Comments and requests for a public hearing must be received by 
January 13, 2015.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-136676-13), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR 
(REG-136676-13), Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue NW., Washington, DC 20224. Alternatively, taxpayers 
may submit comments electronically via the Federal eRulemaking Portal 
at www.regulations.gov (IRS REG-136676-13).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Hollie Marx, (202) 317-6844; concerning the submission of comments and 
requests for a public hearing, Oluwafunmilayo Taylor, (202) 317-6901 
(not toll-free calls).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed regulations to amend certain Income 
Tax Regulations (26 CFR Part 1) issued under section 6050P of the 
Internal Revenue Code (Code), which provide that the 36-month non-
payment testing period is an identifiable event triggering an 
information reporting obligation for discharge of indebtedness by 
certain entities. The proposed regulations would remove the 36-month 
non-payment testing period as an identifiable event.

Statutory Provisions

    Section 61(a)(12) provides that income from discharge of 
indebtedness is includible in gross income. Section 6050P was added to 
the Code by section 13252 of the Omnibus Budget Reconciliation Act of 
1993, Public Law 103-66 (107 Stat. 312, 531-532 (1993)). Section 6050P 
was enacted in part ``to encourage taxpayer compliance with respect to 
discharged indebtedness'' and to ``enhance the ability of the IRS to 
enforce the discharge of indebtedness rules.'' H.R. Rep. No. 103-111, 
at 758 (1993). As originally enacted, section 6050P generally required 
applicable financial entities (generally financial institutions, credit 
unions, and Federal executive agencies) that discharge (in whole or in 
part) indebtedness of $600 or more during a calendar year to file 
information returns with the IRS and to furnish information statements 
to the persons whose debt is discharged. In addition to other 
information prescribed by regulations, an applicable financial entity 
is required to include on the information return the debtor's name, 
taxpayer identification number, the date of the discharge, and the 
amount discharged. See 26 U.S.C. 6050P(a) (1994).
    The Debt Collection Improvement Act of 1996 (1996 Act), Public Law 
104-134 (110 Stat. 1321, 1321-368 through 1321-369 (1996)) was enacted 
on April 26, 1996. Section 31001(m)(2)(B)(i) and (ii) of the 1996 Act 
amended section 6050P to expand the reporting requirement to cover 
``applicable entities,'' which includes any executive, judicial, or 
legislative agency, not just federal executive agencies, and any 
previously covered applicable financial entity. Effective for 
discharges of indebtedness occurring after December 31, 1999, section 
533(a) of the Ticket to Work and Work Incentives Improvement Act of 
1999 (1999 Act), Public Law 106-170 (113 Stat. 1860, 1931 (1999)), 
added subparagraph (c)(2)(D) to section 6050P, to further expand 
entities covered by the reporting requirements to include any 
organization the ``significant trade or business of which is the 
lending of money.''
    On April 4, 2000, the IRS released Notice 2000-22 (2000-1 CB 902) 
to provide penalty relief to organizations that were newly made subject 
to section 6050P by the 1999 Act (organizations

[[Page 61792]]

with a significant trade or business of lending money and agencies 
other than Federal executive agencies). The relief applied to penalties 
for failure to file information returns or furnish payee statements for 
discharges of indebtedness occurring before January 1, 2001. On 
December 26, 2000, the IRS released Notice 2001-8 (2001-1 CB 374) to 
extend the penalty relief for organizations described in Notice 2000-22 
for discharges of indebtedness that occurred prior to the first 
calendar year beginning at least two months after the date that 
appropriate guidance is issued.

Regulatory History

    On December 27, 1993, temporary regulations under section 6050P 
relating to the reporting of discharge of indebtedness were published 
in the Federal Register (TD 8506) (58 FR 68301). The temporary 
regulations provided that an applicable financial entity must report a 
discharge of indebtedness upon the occurrence of an identifiable event 
that, considering all the facts and circumstances, indicated the debt 
would never have to be repaid. The temporary regulations provided a 
non-exhaustive list of three identifiable events that would give rise 
to the reporting requirement under section 6050P: (1) A discharge of 
indebtedness under title 11 of the United States Code (Bankruptcy 
Code); (2) an agreement between the applicable financial entity and the 
debtor to discharge the indebtedness, provided that the last event to 
effectuate the agreement has occurred; and (3) a cancellation or 
extinguishment of the indebtedness by operation of law. These 
regulations were effective for discharges of indebtedness occurring 
after December 31, 1993.
    A concurrently published notice of proposed rulemaking (IA-63-93) 
(58 FR 68337) proposed to adopt those and other rules in the temporary 
regulations. Written comments were received in response to the notice 
of proposed rulemaking, and testimony was given at a public hearing 
held on March 30, 1994. In response to the comments and testimony, the 
IRS provided, in Notice 94-73 (1994-2 CB 553), interim relief from 
penalties for failure to comply with certain of the reporting 
requirements of the temporary regulations for discharges of 
indebtedness occurring before the later of January 1, 1995, or the 
effective date of final regulations under section 6050P.
    On January 4, 1996, prior to the amendments made by the 1996 Act, 
final regulations relating to the information reporting requirements of 
applicable financial entities for discharges of indebtedness were 
published in the Federal Register (TD 8654) (61 FR 262) (1996 final 
regulations). The final regulations were generally effective for 
discharges of indebtedness occurring after December 21, 1996, although 
applicable financial entities at their discretion could apply the final 
regulations to any discharge of indebtedness occurring on or after 
January 1, 1996, and before December 22, 1996. Further, the preamble to 
these regulations provided that the temporary regulations and the 
interim relief provided in Notice 94-73 remained in effect until 
December 21, 1996. Finally, the 36-month non-payment testing period 
identifiable event would not occur prior to December 31, 1997. See 
Sec.  1.6050P-1(b)(2)(iv)(C) of the 1996 final regulations.
    In response to objections by commenters, the 1996 final regulations 
did not adopt the facts and circumstances test to determine whether a 
discharge of indebtedness had occurred and information reporting was 
required. Instead, the 1996 final regulations provided that a debt is 
deemed to be discharged for information reporting purposes only upon 
the occurrence of an identifiable event specified in an exhaustive list 
under Sec.  1.6050P-1(b)(2), whether or not an actual discharge has 
occurred on or before the date of the identifiable event. See Sec.  
1.6050P-1(a)(1).
    Section 1.6050P-1(b)(2) of the 1996 final regulations listed eight 
identifiable events that trigger information reporting obligations on 
the part of an applicable financial entity: (1) A discharge of 
indebtedness under the Bankruptcy Code; (2) a cancellation or 
extinguishment of an indebtedness that renders the debt unenforceable 
in a receivership, foreclosure, or similar proceeding in a federal or 
state court, as described in section 368(a)(3)(A)(ii) (other than a 
discharge under the Bankruptcy Code); (3) a cancellation or 
extinguishment of an indebtedness upon the expiration of the statute of 
limitations for collection (but only if, and only when, the debtor's 
statute of limitations affirmative defense has been upheld in a final 
judgment or decision in a judicial proceeding, and the period for 
appealing it has expired) or upon the expiration of a statutory period 
for filing a claim or commencing a deficiency judgment proceeding; (4) 
a cancellation or extinguishment of an indebtedness pursuant to an 
election of foreclosure remedies by a creditor that statutorily 
extinguishes or bars the creditor's right to pursue collection of the 
indebtedness; (5) a cancellation or extinguishment of an indebtedness 
that renders a debt unenforceable pursuant to a probate or similar 
proceeding; (6) a discharge of indebtedness pursuant to an agreement 
between an applicable entity and a debtor to discharge indebtedness at 
less than full consideration; (7) a discharge of indebtedness pursuant 
to a decision by the creditor, or the application of a defined policy 
of the creditor, to discontinue collection activity and discharge debt; 
(8) the expiration of a 36-month non-payment testing period.
    The first seven identifiable events are specific occurrences that 
typically result from an actual discharge of indebtedness. The eighth 
identifiable event, the expiration of a 36-month non-payment testing 
period, may not result from an actual discharge of indebtedness. The 
36-month non-payment testing period was added to the final regulations 
in 1996 as an additional identifiable event in response to concerns of 
creditors that the facts and circumstances approach taken in the 
temporary and proposed regulations was unclear regarding the effect of 
continuing collection activity. Creditors proposed (among other things) 
that the final regulations require reporting after a fixed time period 
during which there had been no collection efforts.
    Section 1.6050P-1(b)(2)(iv) of the 1996 regulations sets forth the 
36-month non-payment testing period rule (the 36-month rule). Under 
that rule, a rebuttable presumption arises that an identifiable event 
has occurred if a creditor does not receive a payment within a 36-month 
testing period. The creditor may rebut the presumption if the creditor 
engaged in significant bona fide collection activity at any time within 
the 12-month period ending at the close of the calendar year or if the 
facts and circumstances existing as of January 31 of the calendar year 
following the expiration of the non-payment testing period indicate 
that the indebtedness has not been discharged. A creditor's decision 
not to rebut the presumption that an identifiable event has occurred 
pursuant to the 36-month rule is not an indication that it has 
discharged the debt. Concluding that the debts have, in fact, been 
discharged, some taxpayers may include in income the amounts reported 
on Forms 1099-C even though creditors may continue to attempt to 
collect the debt after issuing a Form 1099-C as required by the 36-
month rule. See Sec.  1.6050P-1(a)(1) and (b)(iv).
    On October 25, 2004, final regulations reflecting the amendments to 
section 6050P(c) were published in the Federal Register (TD 9160) (69 
FR 62181). These regulations describe circumstances in which an 
organization has a significant trade or business of lending money and

[[Page 61793]]

provide three safe harbors under which organizations will not be 
considered to have a significant trade or business of lending money.
    On November 10, 2008, final and temporary regulations were 
published in the Federal Register (TD 9430) (73 FR 66539) (2008 
regulations) to amend the regulations under section 6050P to exempt 
from the 36-month rule entities that were not within the scope of 
section 6050P as originally enacted (organizations with a significant 
trade or business of lending money and agencies other than Federal 
executive agencies). The changes made by the 2008 regulations reduced 
the burden on these entities and protected debtors from receiving 
information returns that reported discharges of indebtedness from these 
entities before a discharge had occurred. The 2008 regulations also 
added Sec.  1.6050P-1(b)(2)(v), which provided that, for organizations 
with a significant trade or business of lending money and agencies 
other than federal executive agencies that were required to file 
information returns pursuant to the 36-month rule in a tax year prior 
to 2008 and failed to file them, the date of discharge would be the 
first identifiable event, if any, described in Sec.  1.6050P-
1(b)(2)(i)(A) through (G) that occurs after 2007. On September 17, 
2009, final regulations were published in the Federal Register (TD 
9461) (74 FR 47728-01) adopting the 2008 regulations without change.

Notice 2012-65

    Even after the amendments to the regulations in 2008 and 2009, 
concerns continued to arise about the 36-month rule, and taxpayers 
remained confused regarding whether the receipt of a Form 1099-C 
represents cancellation of debt that must be included in gross income. 
To address those concerns, in Notice 2012-65 (2012-52 IRB 773 (Dec. 27, 
2012)), the Treasury Department and the IRS requested comments from the 
public regarding whether to remove or modify the 36-month rule as an 
identifiable event for purposes of information reporting under section 
6050P. Ten comments were received, all recommending removal or revision 
of the 36-month rule. Several commenters generally expressed concerns 
that the expiration of a 36-month non-payment testing period does not 
necessarily coincide with an actual discharge of the indebtedness, 
leading to confusion on the part of the debtor and, in some instances, 
uncertainty on the part of the creditor regarding whether it may 
lawfully continue to pursue the debt. Additionally, commenters noted 
that the IRS's ability to collect tax on discharge of indebtedness 
income may be undermined if the actual discharge occurs in a different 
year than the year of information reporting.

Explanation of Provisions

    The Treasury Department and the IRS agree that information 
reporting under section 6050P should generally coincide with the actual 
discharge of a debt. Because reporting under the 36-month rule may not 
reflect a discharge of indebtedness, a debtor may conclude that the 
debtor has taxable income even though the creditor has not discharged 
the debt and continues to pursue collection. Issuing a Form 1099-C 
before a debt has been discharged may also cause the IRS to initiate 
compliance actions even though a discharge has not occurred. 
Additionally, Sec.  1.6050P-1(e)(9) provides that no additional 
reporting is required if a subsequent identifiable event occurs. 
Therefore, in cases in which the Form 1099-C is issued because of the 
36-month rule but before the debt is discharged, the IRS does not 
subsequently receive third-party reporting when the debt is discharged. 
The IRS's ability to enforce collection of tax for discharge of 
indebtedness income may, thus, be diminished when the information 
reporting does not reflect an actual cancellation of indebtedness. 
After considering the public comments and the effects on tax 
administration, the Treasury Department and the IRS propose to remove 
the 36-month rule.
    In addition to the comments recommending removal of the 36-month 
rule, commenters made other suggestions to change this rule, which were 
not adopted. One commenter suggested that the rule should be revised to 
require information reporting after 24 months of non-payment, without 
regard to the creditor's collection efforts. The commenter suggested 
that most debts are not collectible after 24 months of non-payment and 
that requiring information reporting after 24 months would allow the 
IRS time to assess. This commenter also suggested that the Form 1099-C 
should be revised to clarify that the issuance of a Form 1099-C does 
not mean that the debt is discharged, and that creditors should be 
required to issue corrected Forms 1099-C if they receive payments after 
the first Form 1099-C is issued.
    The revisions proposed by the commenter do not alleviate the 
problems to debtors, creditors, and the IRS caused by the 36-month 
rule. There is no indication that merely shortening the time before a 
Form 1099-C is required to be issued more closely comports with the 
actual discharge of indebtedness. For example, even if the debt has 
actually been discharged, the amount reported on the Form 1099-C may 
not be the same as the amount that the taxpayer is required to report 
as income because, for instance, the taxpayer may be entitled to claim 
an exclusion or an exemption. In addition, the Instructions for Debtor 
on Form 1099-C already explain that the issuance of a Form 1099-C does 
not necessarily mean that the debtor must include the cancellation of 
debt in gross income. As a result, such revisions would fail to address 
the fact that issuance of a Form 1099-C pursuant to the 36-month rule 
does not necessarily coincide with a discharge of indebtedness. Also, 
the commenter's suggestion that creditors be required to issue a 
corrected Form 1099-C if they later receive a payment from the debtor 
would not reduce the debtor's confusion about what receipt of a Form 
1099-C issued pursuant to the 36-month rule means. The issuance of a 
corrected Form 1099-C after the debtor has already reported discharge 
of indebtedness income with respect to the discharge that is reported 
on the corrected Form 1099-C could require the debtor to file amended 
returns to report the reduced amount of cancellation indebtedness and 
the debtor may be entitled to a refund. Issuance of a corrected Form 
1099-C would increase, not decrease, the debtor's confusion regarding 
how to proceed.
    One commenter suggested that the rule should be retained because it 
eliminates the possibility of a ``permanent deferral'' of information 
reporting of a discharged debt. This commenter noted two recent Tax 
Court cases, Kleber v. Commissioner, T.C. Memo. 2011-233, and Stewart 
v. Commissioner, T.C. Sum. Op. 2012-46, in which the court used the 36-
month rule to determine the year in which a debt was discharged. In 
both cases, the court determined that the statute of limitations for 
assessment had expired before a Form 1099-C was issued. The commenter 
stated that confusion could result if the 36-month rule is eliminated 
for information reporting purposes, but the court continues to use it 
to determine whether there has been an actual discharge. The commenter 
viewed this as a reason to retain the rule in a modified form. The 
commenter suggested that the Treasury Department and the IRS modify the 
36-month rule and Sec.  1.6050P-1(b)(2)(i)(G) by: (1) Treating a 
creditor's decision to discontinue collection activities as an

[[Page 61794]]

identifiable event, whether or not that decision coincides with an 
actual discharge; (2) placing a 36-month time limit on a creditor's 
defined policy for discharging a debt under Sec.  1.6050P-
1(b)(2)(i)(G); (3) prohibiting creditors from issuing Forms 1099-C 
while collection activities are ongoing or while the creditor is 
considering selling the debt; and (4) requiring creditors to issue 
corrected Forms 1099-C if they engage in subsequent collection 
activities or receive a payment on the debt.
    Because the revisions suggested by this commenter would not require 
information reporting only upon an actual discharge of indebtedness, 
the revisions would not eliminate the problems associated with issuance 
of Forms 1099-C under the 36-month rule. Adopting these changes could 
increase, not decrease, confusion, because they would modify another 
identifiable event, Sec.  1.6050P-1(b)(2)(i)(G), to require that a 
debtor's policy for discharging debt incorporate a 36-month discharge 
rule. Additionally, as explained in this preamble, requiring creditors 
to issue corrected Forms 1099-C would neither improve tax compliance 
nor reduce debtors' confusion. Eliminating the 36-month rule for 
information reporting purposes, moreover, is likely to lead courts to 
cease using it as an identifiable event for purposes of determining 
when an actual discharge occurs, thereby eliminating the issue of the 
IRS being precluded from assessing tax on discharge of indebtedness 
before the information return has been issued.

Effective Date

    Sections 1.6050P-1(b)(2)(i)(H), 1.6050P-1(b)(2)(iv), and 1.6050P-
1(b)(2)(v) would be removed on the date these regulations are published 
as final regulations in the Federal Register. Conforming amendments to 
Sec.  1.6050P-1(h)(1) necessary as a result of the removal of the 
above-referenced sections would be effective on the same date.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order 13563. 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. Because the regulations do not 
impose a collection of information on small entities, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to 
section 7805(f) of the Code, this notice of proposed rulemaking has 
been submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed rules. All comments will be available at 
www.regulations.gov or upon request.
    A public hearing will be scheduled if requested by any person who 
timely submits comments. If a public hearing is scheduled, notice of 
the date, time, and place for the hearing will be published in the 
Federal Register.

Drafting Information

    The principal author of these proposed regulations is Hollie Marx 
of the Office of Associate Chief Counsel (Procedure and 
Administration).

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be 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-1 is amended by:
0
a. Removing paragraphs (b)(2)(i)(H), (b)(2)(iv), and (b)(2)(v).
0
b. Revising paragraph (h).
    The revision reads as follows:


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

* * * * *
    (h) Effective/applicability date. The rules in this section apply 
to discharges of indebtedness after December 21, 1996, except 
paragraphs (e)(1) and (3) of this section, which apply to discharges of 
indebtedness after December 31, 1994, and except paragraph (e)(5) of 
this section, which applies to discharges of indebtedness occurring 
after December 31, 2004.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2014-24392 Filed 10-14-14; 8:45 am]
BILLING CODE 4830-01-P