IRS issues final regulations on information reporting.

On Jan. 3, 1996, the IRS issued its long-awaited final regulations under Sec. 6050P, which relate to the information reporting requirements of applicable financial entities for discharges of indebtedness. The final regulations reflect many of the changes recommended by critics of the proposed and temporary regulations issued on Dec. 27, 1993. The effective date of the final regulations is generally Dec. 21, 1996.

The Omnibus Budget Reconciliation Act of 1993 (OBRA) created Sec. 6050P, which requires that certain financial entities file information returns with the Service and provide debtors with payee statements (Forms 1099-C, Cancellation of Debt) for any discharges of indebtedness of $600 or more occurring after Dec. 31, 1993.

Under Regs. Sec. 1.6050P-1 (b), indebtedness is considered discharged, and reporting required, on the occurrence of an identifiable event. The regulations contain an exclusive list of eight such events.

1. Discharges in bankruptcy if the creditor knows the debtor incurred the indebtedness for business or investment purposes.

2. A cancellation or extinguishment that renders a debt unenforceable in a receivership, foreclosure, or similar proceeding in a Federal or state court, as described in Sec. 368(a) (3) (A) (ii).

3. A cancellation or extinguishment on the expiration of the statute of limitations defense is upheld in a final judgment of decision of a judicial proceeding.

4. A cancellation or extinguishment pursuant to an election of foreclosure remedies by a creditor that statutorily extinguishes or bars the creditor's right to pursue collection of the debt.

5. A cancellation or extinguishment that renders a debt unenforceable pursuant to a probate or similar proceeding.

6. A discharge pursuant to an agreement between the financial entity and debtor to discharge the debt at less than full consideration.

7. A discharge pursuant to a decision by, or a defined policy of, the creditor to discontinue collection activity.

8. There is a rebuttable presumption that an identifiable event has occurred on the expiration of a 36-month period ending at the close of the year if a creditor has not received a payment on the debt during the 36-month period.

Under the temporary regulations, indebtedness is considered discharged for information reporting purposes when an identifiable event occurs which indicates that the debtor is no longer obligated to pay the indebtedness, taking into account all facts and circumstances. While the temporary regulations provided three examples of an identifiable event (discharges under Title 11; an agreement between the lender and borrower to discharge all or part of a debt; and a cancellation of debt by operation of law), they clearly state that this is not an exclusive list of such events. The existence of an exclusive list in the final regulations means that creditors will not be required to weight the facts and circumstances of each discharge to determine whether it must be reported. In Notice 94-73, the IRS provided relief from penalties for failure to comply with certain cancellation of indebtedness reporting requirements imposed by the temporary regulations. This waiver will be in effect through the effective date of the final regulations (generally, Dec. 21, 1996).

The final regulations do not require the reporting of amounts of discharged interest, nor, in the case of a lending transaction, discharged amounts other than principal. In the case of nonlending transactions, however, the total amount owed, such as a fee, fine or penalty, is reportable if discharged. The final regulations also require reporting with respect to all parties involved in a multiple debtor borrowing unless the amount of indebtedness was less than $10,000 or if the multiple debtors are husband and wife. To the extent that there are multiple creditors on a discharged loan, each must report discharges of $600 or more allocable to them, although a lead bank or other designee may report the discharge on behalf of all the creditors.