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Taxpayer Doesn't Have COD Income from Waiver to Repay Overpaid Pension Payments

(Parker Tax Publishing November 2017)

The IRS ruled that a taxpayer did not have to include in income certain cancellation of indebtedness income because the debt that was forgiven related to excess pension plan payments the taxpayer received and had already included in income. The IRS said that the taxpayer should not include the amount of the cancelled debt on Form 1040, even if the taxpayer receives a Form 1099-C, Cancellation of Indebtedness Income. PLR 201743011.

Under the facts in PLR 201743011, a taxpayer worked for an employer until the taxpayer retired. While the taxpayer was working for the employer, the taxpayer made after-tax contributions to the employer's pension plan. Due to the taxpayer's years of service as an employee, the taxpayer became eligible to receive payments from the pension plan. The taxpayer began receiving payments from the pension plan and included the taxable portion of the pension payments in gross income on Form 1040. In accordance with Notice 88-118 and Code Sec. 72(b), the taxpayer used the simplified safe harbor method to determine the tax-free and taxable portions of the pension plan payments.

The taxpayer subsequently received a letter stating that the pension payments were going to be reduced in the future due to systematic errors made years ago. The department administering the pension plan said that the calculations showed that the taxpayer had received an overpayment of a certain amount due to errors in the calculation of the taxpayer's benefit. The department said it had the discretion to waive past overpayments if certain criteria were satisfied and determined that the taxpayer satisfied the criteria for an automatic waiver of the collection of the overpayment. The department said it would be sending the taxpayer a Form 1099-C, Cancellation of Debt, to reflect its waiver of the collection of the overpayment.

The taxpayer requested a private letter ruling from the IRS stating that the taxpayer did not have cancellation of indebtedness income due to the department waiving the collection of the pension overpayments.

The IRS ruled that the taxpayer did not have to include in income the forgiveness of the obligation to repay the pension overpayment. According to the IRS, the taxpayer should not report the amount of the overpayment on Form 1040, even if a Form 1099-C reflecting the waiver of the collection of the pension overpayment is received by the taxpayer. The discharge of indebtedness is not gross income, the IRS said, because the taxpayer had already accounted for all the pension payments in gross income under Notice 88-118 as the taxpayer received them.

The IRS further noted that, pursuant to Section 7.06 of Rev. Proc. 2017-1, the taxpayer is required to attach a copy of the letter ruling to any federal income tax return to which the letter is relevant. If the taxpayer files a return electronically, the IRS said that the taxpayer may satisfy this requirement by attaching a statement to the tax return that provides the date and control number of the letter ruling.

For a discussion of cancellation of indebtedness income, see Parker Tax ¶72,301.

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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