Temporary Regs on Reporting Discharged Indebtedness

 [4830-01-u]

 ACTION: Temporary regulations.

 SUMMARY: This document contains temporary regulations relating to the information reporting requirements of certain financial entities for discharges of indebtedness. The regulations reflect changes to the Internal Revenue Code made by section 13252 of the Omnibus Budget Reconciliation Act of 1993 (the Act). The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.

 DATES: These regulations are effective January 1, 1994, and apply to discharges of indebtedness after December 31, 1993.

 FOR FURTHER INFORMATION CONTACT: Johnnel L. St. Germain (timing and amount of discharge) at (202) 622-4930 or Michael F. Schmit at (202) 622-4960, both of the Office of Assistant Chief Counsel (Income Tax and Accounting). Neither telephone number is toll-free.

SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

This regulation is being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collection of information contained in this regulation has been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget (OMB) under control number 1545-1419. The time estimates for the reporting requirements contained in this regulation are reflected in the burden estimates for Form 1099-C.

 For further information concerning this collection of information, and where to submit comments on the collection of information, the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the cross- referencing notice of proposed rulemaking published elsewhere in this issue of the Federal Register.

BACKGROUND

This document contains amendments to the Income Tax Regulations (26 CFR parts 1 and 602) under section 6050P of the Internal Revenue Code (Code). Section 6050P requires certain financial entities to report discharges of indebtedness of $600 or more during any calendar year, and requires that reporting entities make a return at such time and in such form as the Secretary may by regulations prescribe. Thus, these temporary regulations are necessary to set forth the time, form, and manner of reporting under section 6050P, and to provide guidance relating to the discharge of indebtedness.

EXPLANATION OF PROVISIONS

 REPORTING REQUIREMENTS. The temporary regulations provide that, in general, financial entities described in section 6050P(c)(1) of the Code (applicable financial entities) must report discharges of indebtedness of $600 or more on Form 1099-C. Form 1099-C must be filed with the appropriate Internal Revenue Service office designated in the instructions for that form on or before February 28 of the calendar year following the year in which a reportable discharge occurs. The information return must be filed for each individual or entity whose indebtedness is discharged, and must contain: (a) the name, address, and taxpayer identification number (TIN) of the debtor; (b) the date on which the indebtedness was discharged; (c) the amount of indebtedness discharged, the amount of indebtedness discharged that is interest, and the amount of indebtedness discharged that is penalties, administrative costs, and fines; (d) a description of the origin of the indebtedness; (e) an indication that the indebtedness was discharged in bankruptcy, if known; and (f) such other information as may be required by Form 1099-C or its instructions.

 The regulations provide that section 6050P filers must also furnish a written statement to the individual or entity whose indebtedness is discharged. The written statement is to be furnished by January 31 of the year following the calendar year in which the indebtedness was discharged.

 The regulations also provide guidance on when an indebtedness is considered discharged and the amount of indebtedness discharged for purposes of the information reporting requirements of section 6050P. The Service believes this guidance will help applicable financial entities comply with the section 6050P requirements to report this information.

 WHEN AN INDEBTEDNESS IS DISCHARGED. The regulations provide that, in general, indebtedness will be considered discharged for purposes of section 6050P(a)(2) upon the occurrence of an identifiable event indicating that the indebtedness will never have to be paid by the debtor, taking into account all the facts and circumstances. This is consistent with the present law determination of when discharge occurs. See, e.g., Cozzi v. Commissioner, 88 T.C. 435 (1987).

 Under the regulations, an identifiable event includes, but is not limited to: (a) discharge of indebtedness under title 11 of the United States Code; (b) an agreement between the applicable financial entity and the debtor to discharge all or a part of an indebtedness (including an agreement that results in an exchange under section 1001); and (c) a cancellation or extinguishment by operation of law that renders the debt unenforceable (such as the expiration of the statute of limitations for collection of the indebtedness). In contrast, a bookkeeping entry (such as a deduction for book or regulatory reporting purposes or a partial or full bad debt deduction for tax purposes) is not, of itself, an identifiable event. However, a bookkeeping entry is one of the facts and circumstances taken into account in determining whether a discharge has occurred. Similarly, collection activity by the applicable financial entity is one of the facts and circumstances taken into account in determining whether a discharge has occurred.

 AMOUNT OF INDEBTEDNESS DISCHARGED. For purposes of reporting the amount of indebtedness discharged, the regulations provide that indebtedness is any amount owed to an applicable financial entity, including principal, interest, penalties, administrative costs, and fines, to the extent the amount constitutes an indebtedness under section 61(a)(12). The amount of indebtedness discharged may represent all, or only a part, of the total amount owed to the applicable financial entity. The legislative history makes it clear that reporting is required whether or not the amount of debt discharged is includible in the debtor's gross income. H.R. Conf. Rep. No. 213, 103d Cong., 1st Sess. 1, 671 (1993).

 The regulations do not address whether the settlement of a disputed debt is a discharge of indebtedness within the meaning of section 61(a)(12) and, thus, is required to be reported under section 6050P. The Service welcomes comments on the treatment of the settlement of disputed debts under section 6050P.

 OTHER ISSUES. The regulations provide that, if a discharge of indebtedness reportable under section 6050P occurs in a transaction also reportable under section 6050J (relating to foreclosures and abandonments of secured property), both Form 1099-A, Acquisition or Abandonment of Secured Property, and Form 1099-C, Cancellation of Debt, must be filed. The Service welcomes comments on coordinating the information reporting required under section 6050J with that required under section 6050P.

 The regulations also provide rules relating to the use of magnetic media, TIN solicitations, recordkeeping requirements, and reporting with respect to multiple debtors.

 EFFECTIVE DATE. The temporary regulations are effective for debts discharged after December 31, 1993.

SPECIAL ANALYSES

 It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses.

DRAFTING INFORMATION

 The principal authors of these regulations are Michael F. Schmit and Johnnel L. St. Germain of the Office of Assistant Chief Counsel (Income Tax and Accounting). However, other personnel from the IRS and Treasury Department participated in their development.

LIST OF SUBJECTS

26 CFR part 1

 Income taxes, Reporting and recordkeeping requirements. 26 CFR part 602

 Reporting and recordkeeping requirements.

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows:

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

Section 1.6050P-1T also issued under 26 U.S.C. 6050P. * * *

Par. 2. Sections 1.6050P-0T and 1.6050P-1T are added to read as follows:

SECTION 1.6050P-0T TABLE OF CONTENTS (TEMPORARY).

This section lists the major captions that appear in section 1. 6050P-1T.

 SECTION 1.6050P-1T INFORMATION REPORTING FOR DISCHARGES OF INDEBTEDNESS BY CERTAIN

(a) REPORTING REQUIREMENT -- (1) IN GENERAL. Any applicable financial entity (as defined in section 6050P(c)(1)) that discharges an indebtedness of any person (within the meaning of section 7701(a)(1)) of at least $600 during a calendar year must file an information return on Form 1099-C with the Internal Revenue Service. The return must include the following information --

(i) The name, address, and taxpayer identification number (TIN), as defined in section 7701(a), of each person whose indebtedness was discharged during the calendar year;

(ii) The date on which the indebtedness was discharged, as described in paragraph (b) of this section;

(iii) The amount of indebtedness discharged, the amount of indebtedness discharged that is interest, and the amount of indebtedness discharged that is penalties, administrative costs, and fines, as described in paragraph (c) of this section;

(iv) A description of the origin of the indebtedness, such as a student loan, a mortgage, or a credit card expenditure;

(v) An indication that the indebtedness was discharged in bankruptcy, if known; and

(vi) Any other information required by Form 1099-C or its instructions.

(2) NO AGGREGATION. For purposes of reporting under this section, multiple discharges of indebtedness of less than $600 during a calendar year are not required to be aggregated unless such separate discharges are pursuant to a plan to evade the reporting requirements of this section.

(3) TIME AND PLACE FOR REPORTING. Returns required by this section must be filed with the Internal Revenue Service office designated in the instructions for Form 1099-C on or before February 28 of the year following the calendar year in which the indebtedness was discharged.

(b) DATE OF DISCHARGE -- (1) IN GENERAL. For purposes of this section, indebtedness will be considered discharged upon the occurrence of an identifiable event indicating that the indebtedness will never have to be paid by the debtor, taking into account all the facts and circumstances.

(2) IDENTIFIABLE EVENTS -- (i) IN GENERAL. An identifiable event includes, but is not limited to --

(A) A discharge of indebtedness under title 11 of the United States Code;

(B) An agreement between the applicable financial entity and the debtor to discharge an indebtedness (including an agreement that results in an exchange under section 1001), provided that the last event necessary to effectuate the discharge has occurred; and

(C) A cancellation or extinguishment by operation of law that renders the debt unenforceable (such as the expiration of the statute of limitations for collection of the indebtedness).

(ii) BOOKKEEPING ENTRIES. A bookkeeping entry (such as a deduction for book or regulatory reporting purposes or a partial or full bad debt deduction for tax purposes) is not, of itself, an identifiable event. However, a bookkeeping entry is one of the facts and circumstances that is taken into account in determining whether a discharge has occurred.

(3) COLLECTION ACTIVITY. Collection activity by the applicable financial entity is one of the facts and circumstances that is taken into account in determining whether a discharge has occurred. For purposes of determining whether part of an indebtedness has been discharged, collection activity with respect to the remaining indebtedness is disregarded.

(c) INDEBTEDNESS -- (1) IN GENERAL. For purposes of reporting the amount of indebtedness discharged under paragraph (a) (iii) of this section, an indebtedness is any amount owed to an applicable financial entity including principal, interest, penalties, administrative costs, and fines, to the extent the amount constitutes an indebtedness for purposes of section 61(a)(12). The amount of indebtedness discharged may represent all, or only a part, of the total amount owed to the applicable financial entity.

(2) AMOUNTS NOT INCLUDIBLE IN INCOME. Discharged indebtedness described in paragraph (c)(1) of this section must be reported regardless of whether the debtor is subject to tax on the discharged debt. Thus, the entire amount of indebtedness discharged must be reported even if, for example, the debt was discharged in bankruptcy, and the reporting entity knows that the debtor qualifies for an exclusion under section 108.

(d) ADDITIONAL RULES -- (1) TRANSACTIONS REPORTABLE UNDER SECTION 6050J. If a discharged indebtedness reportable under this section occurs in a transaction reportable under section 6050J (relating to foreclosures and abandonments of secured property), both Form 1099-A, Acquisition or Abandonment of Secured Property, and Form 1099-C, Cancellation of Debt, must be filed.

(2) MULTIPLE DEBTORS -- (i) IN GENERAL. In the case of a discharge of indebtedness involving more than one debtor, a return under this section must be filed for each debtor that had a debt of $600 or more discharged.

(ii) JOINT AND SEVERAL LIABILITY. If multiple debtors are jointly and severally liable on an indebtedness, the return filed under this section for each debtor must reflect the entire amount of indebtedness discharged.

(3) USE OF MAGNETIC MEDIA. Any return required under section 6050P and this section must be filed on magnetic media to the extent required by section 6011(e) and the regulations thereunder. A failure to file on magnetic media when required constitutes a failure to file an information return under section 6721. Any person not required by section 6011(e) to file returns on magnetic media may request permission to do so under applicable regulations and revenue procedures.

(4) TIN SOLICITATION REQUIREMENT -- (i) IN GENERAL. All reasonable efforts must be made to obtain the TIN of the person whose indebtedness is discharged. For this purpose, the TIN may be obtained at the time the debtor incurs the debt. If the TIN is not obtained prior to the time the debt is discharged, the TIN must be requested of the debtor for purposes of meeting the requirements of this section.

(ii) MANNER OF REQUESTING TIN. A TIN request made after the debt is discharged must clearly notify the debtor that the Internal Revenue Service requires the debtor to furnish its TIN, and that failure to furnish such TIN subjects the debtor to a $50 penalty imposed by the Internal Revenue Service. No particular form is required to solicit a TIN. A request made on Form W-9 satisfies the reasonable efforts requirement of this section. A TIN provided under this section is not required to be certified under penalties of perjury.

(5) RECORDKEEPING REQUIREMENTS. Any applicable financial entity required to file a return with the Internal Revenue Service under paragraph (a) of this section must also retain a copy of the return, or have the ability to reconstruct the data required to be included on the return under paragraph (a)(1) of this section, for at least four years from the date such return is required to be filed under paragraph (a)(3) of this section.

(e) REQUIREMENT TO FURNISH STATEMENT -- (1) IN GENERAL. Any applicable financial entity required to file a return under paragraph (a) of this section must furnish to each person whose name is shown on such return a written statement that includes the following information --

(i) The information required by paragraph (a)(1) of this section;

(ii) The name, address, and TIN of the applicable financial entity required to file a return under paragraph (a) of this section; and

(iii) A legend identifying the statement as important tax information that is being furnished to the Internal Revenue Service, and informing the debtor about a possible negligence penalty or other sanction for failure to report taxable income.

(2) FURNISHING COPY OF FORM 1099-C. The requirement to provide a statement to the debtor will be satisfied if the applicable financial entity furnishes copy B of the Form 1099-C or a substitute statement that complies with the requirements of the current revenue procedure for substitute Forms 1099.

(3) TIME AND PLACE FOR FURNISHING STATEMENT. The statement required by this paragraph (e) must be furnished to the debtor on or before January 31 of the year following the calendar year in which indebtedness was discharged. The statement will be considered furnished to the debtor if it is mailed to the debtor's last known address.

(f) PENALTIES. The penalties for failure to comply with the requirements of this section are provided in sections 6721 through 6724.

(g) EFFECTIVE DATE. This section applies to discharges of indebtedness after December 31, 1993.

PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT.

Par. 3. The authority citation for part 602 continues to read:

Authority: 26 U.S.C. 7805.

Section 602.101 -- [Amended]

Par. 4. Section 602.101(c) is amended by adding "1.6050P- 1T . . . 1545-1419" in numerical order in the table.