1099-C rules

[Judge Roy Bean]

Ladies and gentlemen, I present a conundrum worthy of the minds of Quatloos:

IRS instructions for issuance of 1099-C for "forgiven debt" include this small jewel that is specifically relevant to millions of borrowers who are rapidly headed toward the edge of the cliff known as foreclosure:

"Pass-throughs and REMICs. Until further guidance is issued, no penalty will apply for failure to file Form 1099-C, or provide statements to debtors, for a canceled debt held in pass-through securitized debt arrangement or held by a REMIC....

A pass-through securitized debt arrangement is any arrangement in which one or more debts are pooled and held for 20 or more persons whose interests in the debt are undivided co-ownership interests that are freely ransferable."

In other words, since there is no penalty, the servicer/lender/trustee's agent actually has the option to report or not when dealing with forgiven debt on most mortgages in this country and the resultant impact it may have on the borrower.

Herein lies the conundrum - why are servicers, et al., dealt that kind of enormously powerful card (in terms of negotiating terms and conditions in loss mitigation matters like short sales, etc., with a borrower in trouble)?

I've been given one explanation that they won't issue a 1099-C if the amount reported conflicts with the amounts they've been telling the borrower were owed. Knowing how some of these people creatively play with numbers about how much a borrower allegedly owes, something that comes to mind is the inherent difficulty in making the total amounts of all 1099-C's match with the losses reported on the books at year end.

Does anyone have an idea on what the IRS's rationale was in issuing the original guidance they allude to in the instructions?

[jg]

From http://www.irs.gov/pub/irs-drop/n-01-8.pdf

Notice 2001-8
PURPOSE
This notice extends the suspension of penalties under §§ 6721 and 6722 of the Internal Revenue Code provided by Notice 2000-22, 2000-16 I.R.B. 902 (April 17, 2000), for certain organizations newly subject to § 6050P (that is, those organizations a significant trade or business of which is the lending of money and that are not otherwise described in § 6050P(c)(1) or (2)). Under this notice, penalties will not be imposed on such an organization for failure to file information returns under § 6050P for any discharge of indebtedness that occurs prior to the first calendar year beginning at least two months after the date that appropriate guidance is issued.

This issue is included in the 2007-2008 PRIORITY GUIDANCE PLAN at http://www.irs.gov/pub/irs-utl/2007-2008pgp.pdf so the appropriate guidance has not yet been issued.


The final regulations on this matter can found at http://www.unclefed.com/ForTaxProfs/irs ... td9160.pdf
This section was added in the final regulations:

§1.6050P-1 Information reporting for discharges of indebtedness by certain entities.
(5) Entity formed or availed of to hold indebtedness. Notwithstanding §1.6050P-2(b)(3), if an entity (the transferee entity) is formed or availed of by an applicable entity (within the meaning of section 6050P(c)(1)) for the principal purpose of holding indebtedness acquired (including originated) by the applicable entity, then, for purposes of section 6050P(c)(2)(D),the transferee entity has a significant trade or business of lending money.

This language remained from the proposed to the final regulations:

Conceivably, an entity that otherwise would be required to report under section 6050P with respect to its debt (for example, an entity that regularly and continuously lends money and does not meet the safe harbors of these proposed regulations), could transfer debt that it originates to a special purpose subsidiary or trust in a single transaction. Through this structure, the originator could possibly avoid application of section 6050P by arguing that the reservation of rules in the regulations for pass-through securitized indebtedness arrangements absolves them of any reporting obligation and that the transferee entity does not meet the requirements of regular and continuous lending activity.
To address the foregoing concern, the amendment to §1.6050P-1 by the proposed regulations provides that an entity formed or availed of by an applicable entity for the principal purpose of holding loans acquired or originated by the applicable entity is treated as having a significant trade or business of lending money. Accordingly, the transferee entity itself is treated as an applicable entity for purposes of section 6050P (c)(2)(D). If the entity formed or availed of by the applicable entity is a REMIC or a pass-through securitized indebtedness arrangement as defined in §1.6050P-1(e)(2)(iii)(B), the REMIC or pass-through securitized indebtedness arrangement will be treated as an applicable entity for purposes of section 6050P(c)(2)(D), despite the reservation in §1.6050P-1(e)(2)(iii) and (iv) of the application of section 6050P to holders of interests in REMICs and pass-through securitized indebtedness arrangements.

[Judge Roy Bean]

Thank you, jg.

I think those examples of bureaucracy-speak you quoted deserve some kind of award. For what remains uncertain.

Clearly, the industry's hand in this is an example of how permanently broken present tax regulation really is.

Imagine getting a reprieve on personal income tax issues "pending" further guidance for this amount of time.

[jg]

That is not at all hard to imagine. For one example, see http://www.nysscpa.org/cpajournal/2006/ ... ls/p32.htm

Proposed Treasury Regulations section 1.1402(a)-2 was originally issued by the IRS in 1997. However, because of controversy over the SE tax treatment of limited partners who are active in a partnership’s business, Congress prohibited the IRS from making the regulations final before July 1, 1998, believing instead that Congress should formulate such rules. Since the expiration of the moratorium, neither Congress nor the IRS has acted to clarify the SE tax treatment of LLC members, leaving the proposed regulations as the only administrative guidance on the matter. Thus, while the proposed regulations are not entitled to judicial deference, because they do not represent a legal position, they can be relied on to avoid a penalty under IRC section 6406(f), and there is judicial precedence, in Elkins [81 T.C. 669 (1983)], to reasonably conclude that the courts will sustain the position of a taxpayer who relies on proposed regulations.

I will not trouble you with further examples.

The timing and provision of guidance (or lack thereof) is just a fact of life for the tax practitioner. Unfortunately, it is a fact that complicates the process of acheiving the least legal tax liability without any productive result. It can also be quite difficult to communicate the truth of the fact that a tax position does not have "adequate guidance" to a client paying for advice.

It is my pleasure to be able to help. You are quite welcome.