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

Download as PDF 78908 Federal Register / Vol. 81, No. 218 / Thursday, November 10, 2016 / Rules and Regulations PART 71—DESIGNATION OF CLASS A, B, C, D, AND E AIRSPACE AREAS; AIR TRAFFIC SERVICE ROUTES; AND REPORTING POINTS DEPARTMENT OF THE TREASURY 1. The authority citation for part 71 continues to read as follows: [TD 9793] ■ Internal Revenue Service 26 CFR Part 1 RIN 1545–BM01 Authority: 49 U.S.C. 106(f), 106(g); 40103, 40113, 40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959–1963 Comp., p. 389. Removal of the 36-Month Non-Payment Testing Period Rule § 71.1 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulation. [Amended] 2. The incorporation by reference in 14 CFR 71.1 of FAA Order 7400.11A, Airspace Designations and Reporting Points, dated August 3, 2016, and effective September 15, 2016, is amended as follows: ■ Paragraph 6005 Class E Airspace Areas Extending Upward From 700 Feet or More Above the Surface of the Earth. * * * ASW AR E5 * * Blytheville, AR [Amended] Blytheville, Arkansas International Airport, AR (Lat. 35°57′52″ N., long. 89°56′38″ W.) Blytheville Municipal Airport, AR (Lat. 35°56′26″ N., long. 89°49′51″ W.) That airspace extending upward from 700 feet above the surface within a 7-mile radius of Arkansas International Airport and within a 6.5-mile radius of Blytheville Municipal Airport. ASW AR E5 Brinkley, AR [Amended] Brinkley, Frank Federer Memorial Airport, AR (Lat. 34°52′49″ N., long. 91°10′35″ W.) That airspace extending upward from 700 feet above the surface within a 6.4-mile radius of Frank Federer Memorial Airport. * * * ASW AR E5 * * Clarksville, AR [Amended] Clarksville Municipal Airport, AR (Lat. 35°28′15″ N., long. 93°25′38″ W.) That airspace extending upward from 700 feet above the surface within a 7.3-mile radius of Clarksville Municipal Airport. * * * asabaliauskas on DSK3SPTVN1PROD with RULES ASW AR E5 * * De Queen, AR [Amended] De Queen, J. Lynn Helms Sevier County Airport, AR (Lat. 34°02′49″ N., long. 94°23′58″ W.) That airspace extending upward from 700 feet above the surface within a 6.5-mile radius of J. Lynn Helms Sevier County Airport. Issued in Fort Worth, Texas, on November 2, 2016. Walter Tweedy, Acting Manager, Operations Support Group, ATO Central Service Center. [FR Doc. 2016–27093 Filed 11–9–16; 8:45 am] BILLING CODE 4910–13–P VerDate Sep<11>2014 17:16 Nov 09, 2016 Jkt 241001 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 thirdparty 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 § 1.6050P–1(h). FOR FURTHER INFORMATION CONTACT: Eliezer Mishory at (202) 317–6844 (not a toll-free call). SUPPLEMENTARY INFORMATION: SUMMARY: 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 § 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 36month 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. PO 00000 Frm 00010 Fmt 4700 Sfmt 4700 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, E:\FR\FM\10NOR1.SGM 10NOR1 Federal Register / Vol. 81, No. 218 / Thursday, November 10, 2016 / Rules and Regulations asabaliauskas on DSK3SPTVN1PROD with RULES 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 VerDate Sep<11>2014 16:33 Nov 09, 2016 Jkt 241001 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 § 1.6050P–1(b)(2), whether or not an actual discharge has occurred on or before the date of the identifiable event. See § 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 PO 00000 Frm 00011 Fmt 4700 Sfmt 4700 78909 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 nonpayment testing period, may not result from an actual discharge of indebtedness. The 36-month nonpayment 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 36month 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 nonpayment 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 § 1.6050P– 1(a)(1) and (b)(2)(iv). Finally, the 1996 final regulations provided that an identifiable event with respect to the 36month non-payment testing period in § 1.6050P–1(b)(2)(i)(H) and (b)(2)(iv) could not occur prior to December 31, 1997. See § 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 E:\FR\FM\10NOR1.SGM 10NOR1 78910 Federal Register / Vol. 81, No. 218 / Thursday, November 10, 2016 / Rules and Regulations asabaliauskas on DSK3SPTVN1PROD with RULES 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 § 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 § 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 36month 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 36month 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 VerDate Sep<11>2014 16:33 Nov 09, 2016 Jkt 241001 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, § 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, § 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 PO 00000 Frm 00012 Fmt 4700 Sfmt 4700 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 § 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, § 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 E:\FR\FM\10NOR1.SGM 10NOR1 Federal Register / Vol. 81, No. 218 / Thursday, November 10, 2016 / Rules and Regulations Administration for comment on its impact on small business, and no comments were received. DEPARTMENT OF DEFENSE Drafting Information 32 CFR Part 635 The principal author of these final regulations is Eliezer Mishory of the Office of Associate Chief Counsel (Procedure and Administration). RIN 0702–AA75 List of Subjects in 26 CFR Part 1 AGENCY: Department of the Army [Docket No. USA–2016–HQ–0033] Law Enforcement Reporting ACTION: Income Taxes, Reporting and recordkeeping requirements. Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.6050P–1 is amended by: ■ 1. Removing paragraphs (b)(2)(i)(H), (b)(2)(iv), and (b)(2)(v). ■ 2. Adding the word ‘‘or’’ at the end of paragraph (b)(2)(i)(F). ■ 3. Removing the semicolon and adding a period in its place at the end of paragraph (b)(2)(i)(G). ■ 4. Revising paragraph (h). The revision reads as follows: ■ § 1.6050P–1 Information reporting for discharge of indebtedness by certain entities. asabaliauskas on DSK3SPTVN1PROD with RULES * * * * (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 VerDate Sep<11>2014 16:33 Nov 09, 2016 Jkt 241001 The Department of the Army is amending its Law Enforcement Regulation. Specifically, Army is clarifying language for contractors who are required to register as sex offenders on Army installations. This change will allow the Department to collect information from registered sex offenders in accordance with their contract requirements. This ensures contractors meet the government requirements under the terms and conditions of the contract. DATES: The rule will be effective on December 15, 2016 unless comments are received that would result in a contrary determination. Comments will be accepted on or before December 12, 2016. ADDRESSES: You may submit comments, identified by docket number and/or RIN number and title, by any of the following methods: • Federal Rulemaking Portal: http:// www.regulations.gov. Follow the instructions for submitting comments. • Mail: Department of Defense, Office of the Deputy Chief Management Officer, Directorate for Oversight and Compliance, 4800 Mark Center Drive, Mailbox #24, Alexandria, VA 22350– 1700. Instructions: All submissions received must include the agency name and docket number or Regulatory Information Number (RIN) for this Federal Register document. The general policy for comments and other submissions from members of the public is to make these submissions available for public viewing on the Internet at http://www.regulations.gov as they are received without change, including any personal identifiers or contact information. FOR FURTHER INFORMATION CONTACT: Ms. Katherine Brennan, (703) 692–6721. SUPPLEMENTARY INFORMATION: This direct final rule makes changes to the Department of the Army’s Law Enforcement Reporting rule which published in the Federal Register on March 29, 2016 (81 FR 17385). DoD has determined this rulemaking meets the criteria for a direct final rule SUMMARY: Proposed Amendments to the Regulations * Department of the Army, DoD. Direct final rule. PO 00000 Frm 00013 Fmt 4700 Sfmt 4700 78911 because it involves a change that clarifies language for contractors who are required to register as sex offenders on Army installations per the requirements of their contracts. DoD expects no opposition to the changes and no significant adverse comments. However, if DoD receives a significant adverse comment, the Department will withdraw this direct final rule by publishing a notice in the Federal Register. A significant adverse comment is one that explains: (1) Why the direct final rule is inappropriate, including challenges to the rule’s underlying premise or approach; or (2) why the direct final rule will be ineffective or unacceptable without a change. In determining whether a comment necessitates withdrawal of this direct final rule, DoD will consider whether it warrants a substantive response in a notice and comment process. Executive Summary This rule provides policies and procedures for Army’s implementation of Law Enforcement Reporting. The authority citation is 28 U.S.C. 534, 42 U.S.C. 10601, 18 U.S.C. 922, 10 U.S.C. 1562, 10 U.S.C. Chap. 47, 42 U.S.C. 16901 et seq., 10 U.S.C. 1565, 42 U.S.C. 14135a. The Army is clarifying language for contractors who are required to register as sex offenders on Army installations. This regulatory action imposes no monetary costs to the Agency or public. The benefit to the public is the Army law enforcement community is ensuring the safety and security of the Army installations by ensuring sex offenders required to register are complying with their registration requirements. Regulatory Procedures A. Regulatory Flexibility Act The Department of the Army has certified that the Regulatory Flexibility Act does not apply because the rule does not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601– 612. B. Unfunded Mandates Reform Act The Department of the Army has determined that the Unfunded Mandates Reform Act does not apply because the rule does not include a mandate that may result in estimated costs to State, local or tribal governments in the aggregate, or the private sector, of $100 million or more. C. National Environmental Policy Act The Department of the Army has determined that the National E:\FR\FM\10NOR1.SGM 10NOR1

Agencies

[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