IRS LIMITS CANCELLATION OF INDEBTEDNESS REPORTING REQUIREMENT
The Internal Revenue Service amended its regulations implementing Section 6050P of the Internal Revenue Code, which requires certain organizations, including “applicable financial entities,” to file information returns with the IRS and furnish information statements to debtors in connection with discharges of indebtedness of $600 or more. 73 Fed. Reg. 66539 (Nov. 10, 2008); see also our Firm’s November 10, 2004 “Final Regulations Issued on 1099 Reporting” Alert. “Applicable financial entities” include, among others, financial institutions such as banks and “any organization a significant trade or business of which is the lending of money.” The amended regulations became effective November 10, 2008.
Section 6050P regulations require applicable financial entities to file information returns upon the occurrence of certain defined “identifiable events.” An “identifiable event” includes, among other things, the expiration of a non-payment testing period, which is presumed to expire if a creditor has not received a payment for 36 months. The creditor, however, may rebut this presumption if it has engaged in significant bona fide collection activity. Interested parties urged the IRS to amend this so-called “36-month rule” so that it would not apply to an organization with a significant trade or business of lending money (e.g., a debt purchaser) that has not legally or practically discharged a debt. The IRS agreed and accordingly amended its regulations to provide that the 36-month rule no longer applies to “any organization a significant trade or business of which is the lending of money.” Such organizations, however, still are subject to the reporting requirements should another “identifiable event” occur.
In addition to the above, the IRS clarified that in the case of an organization previously subject to the 36-month rule who (i) was required to file information returns in a tax year prior to 2008 because of the application of the 36-month rule and (ii) failed to so file, the date of discharge is the first identifiable event, if any, that occurs after 2007.
Finally, the IRS indicated that it will continue to consider other comments on the reporting requirement, including a request to clarify the meaning of “stated principal” as it applies to organizations that acquire a loan from a person other than the debtor. The regulations provide that “indebtedness” for purposes of the Section 6050P means any amount owed to an applicable entity, including stated principal, fees, stated interest, penalties, administrative costs and fines. The regulations, however, provide that in the case of a lending transaction, the discharge of any amount other than stated principal is not required to be reported. Commenters have requested that the IRS issue guidance regarding how the limitation from reporting can be applied to debt purchasers who might know only the aggregate amount due on purchased loans, and not know the breakdown of that amount into principal, accrued interest and fees.
- Michael Tomkies and Charles Gall