Removal of the 36-Month Non-Payment Testing Period Rule, 78908-78911 [2016-27160]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 81, Number 218 (Thursday, November 10, 2016)]
[Rules and Regulations]
[Pages 78908-78911]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27160]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9793]
RIN 1545-BM01


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

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SUMMARY: This document contains final regulations that remove the 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 Treasury Department 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 final regulations affect certain financial institutions 
and governmental entities.

DATES: Effective Date: These regulations are effective on November 10, 
2016.
    Applicability Date: For dates of applicability, see Sec.  1.6050P-
1(h).

FOR FURTHER INFORMATION CONTACT: Eliezer Mishory at (202) 317-6844 (not 
a toll-free call).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under section 6050P of the Internal Revenue Code (Code), 
relating to the rule in Sec.  1.6050P-1(b)(2)(iv) that the 36-month 
non-payment testing period is an identifiable event triggering an 
information reporting obligation on Form 1099-C for discharge of 
indebtedness by certain entities. On October 15, 2014, a notice of 
proposed rulemaking (REG-136676-13) was published in the Federal 
Register (79 FR 61791). The notice of proposed rulemaking proposed to 
remove the 36-month non-payment testing period. Written comments 
responding to the proposed regulations were received. The comments have 
been considered in connection with these final regulations and are 
available for public inspection at www.regulations.gov or on request. 
No public hearing was requested or held. After consideration of all the 
comments, the proposed regulations are adopted as final regulations 
without significant modification by this Treasury decision.

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 indebtedness was 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 with a significant 
trade or business of lending money). 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,

[[Page 78909]]

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 by applicable 
financial entities 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) (the 1996 final 
regulations). The 1996 final regulations were generally effective for 
discharges of indebtedness occurring after December 21, 1996, although 
applicable financial entities at their discretion could apply the 1996 
final regulations to any discharge of indebtedness occurring on or 
after January 1, 1996, and before December 22, 1996. Finally, 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.
    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 person's 
indebtedness 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; 
and (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 1996 final 
regulations 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, but the creditor is nonetheless required, for 
information reporting purposes, to report amounts on a Form 1099-C to 
the debtor taxpayer. Taxpayers receiving Forms 1099-C may conclude that 
the debts have, in fact, been discharged, causing the taxpayers to 
erroneously 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)(2)(iv). Finally, the 1996 final regulations 
provided that an identifiable event with respect to the 36-month non-
payment testing period in Sec.  1.6050P-1(b)(2)(i)(H) and (b)(2)(iv) 
could not occur prior to December 31, 1997. See Sec.  1.6050P-
1(b)(2)(iv)(C) of the 1996 regulations.
    On October 25, 2004, final regulations reflecting the amendments to 
section 6050P(c) made by the 1999 Act were published in the Federal 
Register (TD

[[Page 78910]]

9160; 69 FR 62181). These regulations describe circumstances in which 
an organization has a significant trade or business of lending money 
and 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) (the 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 indebtedness 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.

Proposed Regulations

    In response to the comments received, on October 15, 2014, a notice 
of proposed rulemaking (REG-136676-13) proposing removing the 36-month 
rule was published in the Federal Register (79 FR 61791). The Treasury 
Department and the IRS agreed 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.
    Section 1.6050P-1(b)(2)(i)(H), (b)(2)(iv), and (b)(2)(v) were 
proposed to be removed on the date final regulations are published in 
the Federal Register. The proposed regulations also proposed conforming 
amendments to the effective/applicability date provision, Sec.  
1.6050P-1(h).

Explanation and Summary of Comments

    The notice of proposed rulemaking invited comments on the proposed 
removal of the 36-month rule. A public hearing was not requested and 
none was held. Four comments were received. All commenters supported 
the proposal and agreed that the 36-month rule did not increase 
compliance and caused confusion, and supported its removal. 
Accordingly, these final regulations adopt the proposed regulations 
without change (except as described in the Applicability Date section 
of this preamble), remove the 36-month rule from the list of 
identifiable events, and remove related provisions.

Applicability Date

    The notice of proposed rulemaking proposed to amend the effective/
applicability date paragraph in Sec.  1.6050P-1(h) to remove references 
to the 36-month rule that were added along with the 36-month rule in TD 
9461, 74 FR 47728-01, and such amendments would have been both 
effective and applicable as of the date of publication of these final 
regulations in the Federal Register. The Treasury Department and the 
IRS have determined that it is not in the interest of sound tax 
administration to have the removal of the 36-month rule apply for a 
portion of a calendar year. Therefore, these final regulations do not 
adopt the effective/applicability date provision of the proposed 
regulations. Information returns required to be filed under section 
6050P must be filed on or before February 28 (March 31 if filed 
electronically) of the year following the calendar year in which the 
identifiable event occurs and payee statements must be furnished on or 
before January 31 of the year following the calendar year in which the 
identifiable event occurs. The final regulations are applicable to 
information returns required to be filed, and payee statements required 
to be furnished, after December 31, 2016. Because the deadline for 
filing information returns and furnishing payee statements for calendar 
year 2016 would be after December 31, 2016, the expiration of the 36-
month testing period during 2016 does not create a requirement to file 
information returns and furnish payee statements. However, Sec.  
1.6050P-1 (as contained in 26 CFR part 1, revised April 2016) continues 
to apply to information returns required to be filed, and payee 
statements required to be furnished, on or before December 31, 2016.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. 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, the 
notice of proposed rulemaking that preceded these final regulations was 
submitted to the Chief Counsel for Advocacy of the Small Business

[[Page 78911]]

Administration for comment on its impact on small business, and no 
comments were received.

Drafting Information

    The principal author of these final regulations is Eliezer Mishory 
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 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
1. Removing paragraphs (b)(2)(i)(H), (b)(2)(iv), and (b)(2)(v).
0
2. Adding the word ``or'' at the end of paragraph (b)(2)(i)(F).
0
3. Removing the semicolon and adding a period in its place at the end 
of paragraph (b)(2)(i)(G).
0
4. Revising paragraph (h).
    The revision reads as follows:


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

* * * * *
    (h) Applicability dates. This section applies to information 
returns required to be filed, and payee statements required to be 
furnished, after December 31, 2016. Section 1.6050P-1 (as contained in 
26 CFR part 1, revised April 2016) applies to information returns 
required to be filed, and payee statements required to be furnished, on 
or before December 31, 2016.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: October 17, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-27160 Filed 11-9-16; 8:45 am]
 BILLING CODE 4830-01-P