President signs mortgage debt tax relief bill

[Famspear]

Excerpt from article from CCH internet tax research web site on Friday, Dec. 21, 2007:

President Signs Mortgage Debt Tax Relief Bill

Responding to the growing subprime mortgage crises, President Bush on December 20 signed legislation to help homeowners who are facing foreclosure. The new law, the Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648) creates a three-year exception to current law so that certain taxpayers do not have to pay federal taxes for debt forgiveness on their troubled loans.

"Clearly it is unfair to tax people on income that doesn't exist. This is particularly true at a time when they have experienced a substantial economic loss on the most significant asset they own and have no way to pay the tax," noted Sen, George V. Voinovich, R-Ohio, a bill co-sponsor attending the White House signing ceremony.

Bush called HR 3648 "a tax reform" bill because it allows homeowners to secure lower mortgage payments without facing higher taxes.

[ . . . ]

By Paula Cruickshank, CCH News Staff

(bolding added)

The phrase "income that doesn't exist" is of course problematic from an economic perspective, but we believe we understand what Senator Voinovich is trying to convey - and we understand the rationale behind the change in the law.

I have a little speech that I have on very rare occasions given to a client in situations where so-called "phantom income" is a factor. It goes something like this: "There is no Federal cash flow tax. There is a Federal income tax. The Federal income tax is a tax on income, not on cash flow. Income is income, and cash flow is cash flow, and the two are not always the same."

[Judge Roy Bean]

This issue, or more specifically, the issuance of a 1099 for forgiven debt being "optional" (because there is no penalty to the servicer for not issuing one), and thus not reporting the alleged income, was addressed by knowledgable experts 'round these parts some months ago.

The act appears to have removed a negotiating advantage that servicers have had, but it begs the questions:

If the servicer had elected to not report the forgiven debt (thus allegedly "saving" the borrower from the potential taxes), does the IRS expect the taxpayer/borrower to still calculate it, report it and pay the amount due?

[jg]

If the servicer had elected to not report the forgiven debt (thus allegedly "saving" the borrower from the potential taxes), does the IRS expect the taxpayer/borrower to still calculate it, report it and pay the amount due?

Yes, as it is part of gross income it must be reported.
In fact, it is no different than not getting any other form of 1099 whether that is due from the amount being below the minimum to impose a filing requirement or due to lack of following a requirement by the payer.
I see no reason that this type income would be any different than another type of income.