IRS Finalizes Rules on COD Reporting

The IRS on Thursday issued final regulations regarding information returns for cancellation of indebtedness by certain entities (T.D. 9461). The regulations are designed to avoid premature reporting by certain entities that are currently required to file information returns and to reduce the number of returns required to be filed. They finalize temporary regulations that were issued in November 2008 (T.D. 9430).

IRC § 6050P requires certain entities to file information returns with the IRS and to furnish information statements to debtors, reporting discharges of indebtedness of $600 or more. Section 6050P originally applied only to financial institutions, credit unions and federal executive agencies. These “applicable financial entities” were required, under regulations released in 1996, to issue a Form 1099-C, Cancellation of Debt, whenever certain identifiable events occurred. The 1996 regulations also instituted a “36-month rule,” which created a rebuttable presumption that if a creditor had not received a payment on a loan in 36 months, it was required to issue Form 1099-C.

Subsequent legislation expanded section 6050P to cover any executive, judicial or legislative agency and expanded the definition of applicable financial entities to include any organization for which lending money is a significant trade or business. The expansion of the scope of section 6050P raised concerns that the 36-month rule might trigger a reporting requirement even when an entity has not legally or practically discharged a debt. In response to these concerns, the final regulations restrict the scope of the 36-month rule to those entities that were originally within its scope. This will reduce the information reporting burden on commercial lenders and other entities that were not originally within the scope of the 36-month rule and should protect debtors from receiving information returns that prematurely report cancellation of indebtedness income from those entities.

Several issues raised by the temporary regulations’ lone commenter were not addressed in the final regulations, including what information (if any) must be supplied to a debtor prior to filing Form 1099-C; what constitutes “significant bona fide collection activity” that will rebut the presumption of the 36-month rule; and how to report the discharge of a debt that has been reduced to judgment. The IRS says it will consider these issues and determine whether to provide further guidance.