IRS to Eliminate 36-Month Rule Reporting Requirement for Deemed Debt Discharges.
(Parker Tax Publishing October 29, 2014)

Proposed regulations would remove a rule that a deemed discharge of debt for which a Form 1099-C, Cancellation of Debt, must be filed occurs at the expiration of a 36-month non-payment testing period. REG-136676-13 (2014).

Reg. Sec. 1.6050P-1(b)(2)(iv) sets forth a 36-month non-payment testing period rule (the 36-month rule) under which a rebuttable presumption arises that an identifiable event, which triggers an information reporting obligation for discharge of deb, has occurred if a creditor does not receive a payment within a 36-month testing period. The information reporting obligation requires the creditor to whom the debt is owed to send Form 1099-C, Cancellation of Debt, to the debtor. 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 debt has not been discharged. A creditor's decision not to rebut the presumption that an identifiable event has occurred under the 36-month rule is not an indication that the creditor has discharged the debt.

The 36-month rule has created misunderstandings among taxpayers. Receiving the Form 1099-C has caused some taxpayers to conclude that the debts have, in fact, been discharged. As a result, some taxpayers have included 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.

Last week, the IRS said that, besides creating confusion for taxpayers, the 36-month rule does not increase tax compliance by debtors or provide the IRS with valuable third-party information that may be used to ensure taxpayer compliance. As a result, the IRS issued proposed regulations that will remove the 36-month rule.

The 36-month rule is proposed to be eliminated on the date these regulations are finalized.

For a discussion of the 36-month rule, see Parker Tax ¶72,310. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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