[Federal Register Volume 69, Number 205 (Monday, October 25, 2004)]
[Rules and Regulations]
[Pages 62181-62188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-23747]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9160]
RIN 1545-AY35


Information Reporting Under Section 6050P for Discharges of 
Indebtedness

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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[[Page 62182]]

SUMMARY: This document contains final regulations relating to the 
information reporting requirement under section 6050P of the Internal 
Revenue Code (Code) for discharges of indebtedness. These final 
regulations reflect the enactment of section 6050P(c)(2)(D) by the 
Ticket to Work and Work Incentives Improvement Act of 1999. These final 
regulations provide guidance on the information reporting requirements 
for discharges of indebtedness by organizations that have a significant 
trade or business of lending money. This document also contains 
amendments to the existing final regulations to reflect the amendments 
to section 6050P by the Debt Collection Improvement Act of 1996.

DATES: Effective date: These regulations are effective October 25, 
2004.
    Applicability date: These regulations are applicable to discharges 
of indebtedness occurring on or after January 1, 2005.

FOR FURTHER INFORMATION CONTACT: Joseph P. Dewald, at (202) 622-4910 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR parts 1 and 602. The 
amendments describe circumstances in which an organization has a 
significant trade or business of lending money for purposes of section 
6050P(c)(2)(D). The amendments also conform the existing final 
regulations under section 6050P to cover applicable entities, including 
executive, judicial, and legislative agencies.
    In general, section 6050P(a) requires certain organizations 
(applicable entities) to file information returns with the Internal 
Revenue Service (IRS), and to furnish information statements to 
debtors, reporting discharges of indebtedness of $600 or more. As 
enacted by the Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-
66 (107 Stat. 312, 531-532 (1993)), section 6050P required ``applicable 
financial entities'' (including Federal executive agencies) to report 
discharges of indebtedness. The Debt Collection Improvement Act of 
1996, Pub. L. 104-134 (110 Stat. 1321, 368-369 (1996)) (the 1996 Act), 
amended section 6050P to cover ``applicable entities.'' Section 
6050P(c)(1) as amended defines an applicable entity to include: (1) Any 
executive, judicial, or legislative agency (as defined in 31 U.S.C. 
3701(a)(4)); and (2) any applicable financial entity.
    Section 6050P(c)(2)(D) was enacted by section 553(a) of the Ticket 
to Work and Work Incentives Improvement Act of 1999, Pub. L. 106-170 
(113 Stat. 1860, 1931 (1999)) (the 1999 Act), effective for discharges 
of indebtedness occurring after December 31, 1999. The 1999 Act amended 
section 6050P by expanding the applicable financial entities required 
to report. As expanded, the term includes any organization ``a 
significant trade or business of which is the lending of money.''
    The IRS issued Notice 2000-22 (2000-1 C.B. 902), which provides 
that penalties under sections 6721 and 6722 for failures to report 
discharges of indebtedness occurring before January 1, 2001, will not 
be imposed on organizations newly required to report under section 
6050P(c)(2)(D). In Notice 2001-8 (2001-1 C.B. 374), for these same 
organizations, the IRS extended the waiver of penalties to failures to 
report discharges of indebtedness occurring before the first calendar 
year that begins at least two months after final regulations under 
section 6050P(c)(2)(D) are issued.
    A notice of proposed rulemaking under section 6050P(c)(2)(D) (REG-
107524-00) was published in the Federal Register (67 FR 40629) on June 
13, 2002. The proposed regulations address whether an organization has 
a significant trade or business of lending money for purposes of 
section 6050P(c)(2)(D). The proposed regulations also reflect the 
amendments made by the 1996 Act. A public hearing was held on the 
proposed regulations on October 8, 2002. The IRS received written and 
electronic comments responding to the notice of proposed rulemaking. 
After consideration of all comments, the proposed regulations are 
adopted as revised by this Treasury decision.

Explanation of Provisions and Summary of Comments

    Section 6050P(c)(2)(D) requires any organization ``a significant 
trade or business of which is the lending of money'' to report 
discharges of indebtedness. The proposed regulations provide guidance 
on whether an organization is engaged in a trade or business of lending 
money and whether that trade or business is significant. In general, 
the proposed regulations provide that the lending of money is a 
significant trade or business if money is loaned on a regular and 
continuing basis. The proposed regulations provide three safe harbors 
under which organizations will be considered not to have a significant 
trade or business of lending money. The final regulations retain these 
rules.

1. Comments Concerning the Proposed Regulations

A. Obligations Acquired From Persons Other Than the Debtor
    Several commentators requested clarification of the information 
reporting requirements for debt obligations acquired from persons other 
than the debtor. Section 1.6050P-2(e) of the proposed regulations 
provides that lending money includes acquisition of a debt obligation 
from a prior holder of the obligation and that gross income from an 
indebtedness is treated as gross income from lending money regardless 
of whether the debt was originated by the organization itself or by a 
related party. The final regulations clarify that a debt obligation 
acquired from the debtor or any person other than the debtor is subject 
to reporting under section 6050P(c)(2)(D) if the owner of the 
obligation is engaged in a significant trade or business of lending 
money.
B. Gross Income From Lending of Money
    One commentator requested clarification on what amounts constitute 
gross income from lending money. Section 1.6050P-2(d) of the proposed 
regulations provides that gross income from lending money includes 
income from interest, fees, penalties, merchant discount, interchange, 
and gains arising from the sale of an indebtedness. The final 
regulations clarify that gross income from lending money includes: 
Interest (including qualified stated interest, original issue discount, 
and market discount); gains arising from the sale or other disposition 
of indebtedness; penalties with respect to indebtedness (whether or not 
the penalty is interest for Federal tax purposes); and fees with 
respect to indebtedness, including merchant discount or interchange 
(whether or not the fee is interest for Federal tax purposes).
C. ``Factoring'' Transactions
    (i) Commentators' Description of ``Factoring'' Transactions.--
Several commentators addressed reporting issues associated with what 
the commentators called ``factoring.'' One commentator described 
factoring transactions, primarily between unrelated parties, as 
ordinarily involving (a) a factor, who performs the functions described 
below with respect to a pool of short-term accounts receivable (30-, 
60-, or 90-day debt), (b) the factor's client, who sells goods in 
exchange for the short-term accounts receivable, and (c) the client's 
customers, who buy the goods and who

[[Page 62183]]

issue the accounts receivable. According to the commentator, the factor 
generally performs the following functions: Initial credit 
investigation, selective assumption of the risk of loss (sometimes 
referred to as guaranteeing credit), on-going credit monitoring of the 
client's customers, collection, and bookkeeping.
    As described by the commentator, after the credit investigation (on 
either a customer-specific or a pooled basis), the factor informs the 
client if the factor is willing to guarantee the receivables from some 
or all of the client's customers. For customers whose accounts 
receivable the factor will not guarantee, the client may enter into the 
sale and accept an account receivable without the benefit of the 
factor's guarantee or may refuse to extend credit and either make the 
sale for cash or forego the sale altogether.
    The commentator described factors' competitive fees for typical 
transactions with unrelated parties as ranging between 0.35 percent of 
the face value of the accounts receivable (if the client retains the 
collection function) and 0.70 percent of that face value (if the factor 
undertakes the collection function). In either case, the face value on 
the basis of which the fee is computed includes any accounts receivable 
that the client accepts from customers even though the factor is 
unwilling to assume the risk of loss on those accounts receivable. The 
factor determines the rate at which fees are charged on the basis of 
the initial credit investigation and of whether the factor undertakes 
collection and bookkeeping.
    To facilitate collection, according to the commentator, factors 
generally take legal title to the accounts receivable either at the 
time of, or shortly after, the sales transactions. If the factor 
performs all collection, the factor may take title to all accounts 
receivable as soon as they are issued by the customers. If, however, 
the client retains the initial collection responsibilities for a 
specified short period of time, the factor may take title at the end of 
that period only to those accounts receivable that are not paid within 
that period. If the factor guarantees the accounts receivable and 
collects, the factor pays the client, net of the factor's fees, either 
soon after the receivables are collected or by a specified time if the 
receivables have not been collected. If the receivables are not 
guaranteed, the client receives payment only if and when the customer 
pays. The commentator explained that, if the factor has guaranteed the 
receivables, the factor has the right to recovery against a customer. 
If the factor does not guarantee the receivable and assumes collection 
responsibility, the factor assigns title back to the client when the 
receivables become uncollectible under the contract.
    For some clients, the factor also provides liquidity by advancing 
funds against the client's aggregate accounts receivable. Advances are 
made based on the factor's assessment of the client's creditworthiness 
and are treated as a reduction of the amount the factor owes the client 
when the receivables are collected or, if the receivables are 
guaranteed, when the factor is required to pay the client under the 
guarantee. These advances are satisfied by the factor reducing the 
payments otherwise owed to the client. Interest is charged for the 
period of the outstanding advances, and the interest provides 
additional income to the factor over and above the fees for the credit 
investigation, credit guarantee, collection, and bookkeeping functions.
    The commentator urged that the unique aspects of these three-party 
relations make it extremely difficult for factors to report discharges 
under section 6050P. The commentator pointed out that, although the 
factor may hold title to a customer account receivable at the time the 
account receivable is discharged, the client is the one with a direct 
relation with the customer. Even if the factor agreed to guarantee 
accounts receivable of a customer, that decision may have been made 
after an inquiry into the characteristics of the client's customers as 
a group, without any specific knowledge about the particular customer. 
Thus, the factor may know nothing about a customer that happens to be 
in default.
    For these reasons, the commentator suggested that reporting under 
section 6050P should be the responsibility of the client, which has, or 
had, a direct relation with the debtor. The commentator further 
suggested that, if factors are required to report, the $600 dollar 
threshold should be increased or any inclusion of the debtor's taxpayer 
identification number (TIN) should be optional.
    The reporting requirements under section 6050P fall on the entity 
that owns the debt that is discharged. In the case of the transactions 
that the commentator called ``factoring,'' therefore, it is necessary 
to determine who is the owner of the account receivable for Federal tax 
purposes. This determination has to be made on the basis of all the 
facts and circumstances.
    The first question is whether the lending of money is a significant 
trade or business of the factor for the taxable year. This will be the 
case if, on a regular and continuing basis during the calendar year, 
the factor makes advances to the clients or acquires the clients' 
accounts receivable. If the factor is an applicable entity for purposes 
of section 6050P(c)(2)(D), the second question is whether the factor 
owned the account receivable for Federal tax purposes when the account 
receivable was discharged. Section 6050P(c)(2)(D) does not require 
reporting by a factor if the factor was not the owner of the account 
receivable for Federal tax purposes at the time of the identifiable 
event marking the discharge.
    The final regulations do not provide guidance on whether a 
factoring transaction should be treated as a purchase of accounts 
receivable for Federal tax purposes. Whether or not a factoring 
transaction is treated as a purchase for Federal tax purposes depends 
on the facts and circumstances of each transaction. The final 
regulations provide an example describing the reporting obligations if 
an account receivable is treated as purchased for Federal tax purposes 
and, alternatively, if it is not treated as purchased. This example, 
however, is not intended to address whether a purchase has taken place 
for Federal tax purposes, and, thus, no inference is intended 
concerning the character of the transactions addressed in these 
regulations for purposes of section 6050P or for other provisions, 
including for purposes of determining effectively connected income of a 
foreign factor under Sec.  1.864-4(c)(5).
    After evaluating the concerns described by the commentator and the 
requirements imposed by section 6050P, the IRS and the Treasury 
Department believe that the reporting requirements of these final 
regulations, combined with the January 1, 2005, effective date, provide 
reasonable and administrable rules and are consistent with the general 
requirements applicable to information reporting. The final 
regulations, therefore, do not adopt the recommendation that the $600 
threshold be raised for debt obligations acquired from persons other 
than the debtor, nor do the final regulations adopt the recommendation 
that a factor be allowed to report discharges without the debtor's TIN. 
The $600 threshold and the requirement to include the debtor's TIN 
derive from section 6050P.
    (ii) Filer May Request a Waiver of Penalty if the Filer Cannot 
Obtain the Debtor's TIN.--If section 6050P requires an applicable 
entity to file an information return, the applicable entity may request 
a waiver under section 6724 of any information reporting penalties 
under section 6721 and 6722.

[[Page 62184]]

Under section 6724, the IRS may waive the penalties if the failure is 
due to reasonable cause and is not due to willful neglect. Therefore, 
upon a showing of reasonable cause, the IRS may waive the penalty under 
section 6721 for failure to file complete and correct information 
returns (including the failure to include a TIN) and the penalty under 
section 6722 for failure to furnish complete and correct information 
statements (including the failure to include a TIN).
    Under Sec.  301.6724-1(a)(2)(ii), a penalty may be waived for 
reasonable cause if the failure arose from events beyond the filer's 
control. Section 301.6724-1(c)(6)(i) provides that events beyond the 
filer's control include the failure of another person to provide the 
information necessary for the filer to file a correct information 
return. Section 301.6724-1(a)(2) of the regulations provides that to 
establish reasonable cause, the filer must have acted in a responsible 
manner both before and after the failure occurred. Section 301.6724-
1(e) provides that a filer must undertake to act in a responsible 
manner in order to establish reasonable cause for failure to include a 
TIN (the TIN solicitation rules).
    Section 1.6050P-1(e)(6) of the existing final regulations provides 
special TIN solicitation rules for discharges of indebtedness. Under 
these rules, a filer must undertake to act in a responsible manner for 
purposes of section 6724 and the regulations. Section 1.6050P-1(e)(6) 
provides that a TIN obtained at the time of the indebtedness satisfies 
the solicitation requirements, unless the entity required to file knows 
that the TIN is incorrect. The regulations require the filer to solicit 
the debtor's TIN if it has not obtained the debtor's TIN prior to the 
occurrence of an identifiable event marking the discharge of 
indebtedness. The regulations further provide that, if the filer 
solicits the debtor's TIN in the manner described in Sec.  301.6724-
1(e)(1)(i) and (2), the filer is deemed to have acted in a responsible 
manner for purposes of section 6724. Section 1.6050P-1(e)(6)(ii) 
contemplates that the filer may undertake the TIN solicitation after 
the occurrence of the identifiable event. Therefore, a factor that 
fails to include a debtor's TIN on the required information return and 
information statement may request a waiver of penalties and may 
establish reasonable cause under section 6724 if it complies with the 
special TIN solicitation rules in Sec.  1.6050P-1(e)(6).
D. Related Sellers of Nonfinancial Goods or Services
    Commentators requested clarification as to whether a finance 
company that acquires installment sales contracts from a related seller 
should be considered an organization that has a significant trade or 
business of lending money even if the seller would qualify for the 
exception to reporting for seller-financing transactions. Specifically, 
the commentators urged that a finance company related to a commonly 
owned automobile dealership not be required to report the discharge of 
an installment sales contract that originated between the automobile 
dealership and an automobile purchaser.
    The preamble to the proposed regulations explains that section 
6050P(c)(2)(D) applies on an entity-by-entity basis and that the 
seller-financing exception is not available to a separate financing 
subsidiary of a retailer. The 1999 Act took an entity-by-entity 
approach when it expanded the scope of section 6050P to reach ``any 
organization a significant trade or business of which is the lending of 
money (such as finance companies and credit card companies whether or 
not affiliated with financial institutions).'' See Joint Committee on 
Taxation Staff, General Explanation of Tax Legislation Enacted in the 
106th Congress, 107th Cong., 1st Sess. 48 (2001) (emphasis added). The 
final regulations, therefore, do not adopt the recommendation to 
provide an exception to reporting for a company that finances purchases 
by the customers of a separate, but related, seller of nonfinancial 
goods or services.
E. Reporting Amounts That Section 108 Excludes From the Debtor's Income
    Several commentators noted that often debtors may be insolvent at 
the time the debt is discharged and that, in these cases, the discharge 
is excludable from income under section 108(a)(1)(B). The legislative 
history to section 6050P, however, reflects that Congress intended 
entities to report discharges regardless of whether the debtor is 
subject to tax on the discharged debt, including whether the discharge 
qualifies for exclusion under section 108. See H.R. Conf. Rep. No. 213, 
103d Cong., 1st Sess. 671 (1993). This principle is reflected in the 
general rule of Sec.  1.6050P-1(a)(3) of the existing final regulations 
and is not changed by this Treasury Decision. The existing regulations 
provide, ``Except as otherwise provided in [Sec.  1.6050P-1], 
discharged indebtedness must be reported regardless of whether the 
debtor is subject to tax on the discharged debt under sections 61 and 
108 or otherwise by applicable law.''
F. Reporting Discharges of FFELP Loans
    Other commentators requested clarification on the information 
reporting requirements for public, nonprofit guarantors that 
participate in the Federal Family Education Loan Program (FFELP) if the 
debtor defaults on the FFELP loan. According to the comments, a typical 
FFELP transaction involves a borrower, a lender (such as a bank, 
savings and loan association, credit union, school, or state or private 
nonprofit agency), a state or private nonprofit organization (guaranty 
agency), and the U.S. Department of Education. If a guaranty agency 
receives a default claim for nonpayment of a FFELP student loan, the 
guaranty agency generally pays a percentage of the outstanding balance 
to the holder of the loan. The U.S. Department of Education, in turn, 
reimburses the guaranty agency for a percentage of the default claim 
paid to the holder of the loan. The guaranty agency then acts on behalf 
of the U.S. Department of Education collecting against the borrower and 
remitting any amount collected, less a percentage for collection costs, 
to the U.S. Department of Education.
    One commentator suggested that the activities of the guaranty 
agency do not constitute the lending of money. This commentator 
suggested that guarantors of FFELP student loans are not applicable 
entities as defined in section 6050P(c)(2)(D). Another commentator 
suggested that the final regulations provide that the information 
reporting requirements under section 6050P do not apply to any student 
loan made under Title IV of the Higher Education Act, including student 
loans under the FFELP.
    The information reporting requirements under section 6050P apply to 
student loans made under Title IV of the Higher Education Act. If the 
owner of the student loan for Federal tax purposes is an entity or 
organization that is an applicable entity within the meaning of section 
6050P(c)(1), the owner must report under section 6050P upon the 
occurrence of an identifiable event marking the discharge of the 
indebtedness.

2. Comments Concerning the Existing Final Regulations

    Several commentators raised issues relating to the reporting 
requirements in Sec.  1.6050P-1 of the existing final regulations. 
These comments are beyond the scope of this regulation project, which 
addresses whether an

[[Page 62185]]

organization has a significant trade or business of lending money for 
purposes of section 6050P(c)(2)(D), but these comments may be addressed 
in future guidance.
A. Amounts Forgiven Pursuant to the Terms of a Loan
    Commentators requested clarification as to whether an organization 
is required to report amounts forgiven pursuant to the terms of a debt 
obligation, including loan forgiveness under the FFELP upon a stated 
event (such as death, disability, or satisfaction of the service 
requirements of the Teacher Loan Forgiveness Program). The IRS may 
issue future guidance under section 6050P addressing amounts forgiven 
pursuant to the terms of a debt obligation for purposes of section 
6050P. Pending issuance of future guidance, applicable entities will 
not be subject to penalties under section 6721 and section 6722 for 
failure to report under section 6050P amounts forgiven pursuant to the 
terms of a debt obligation.
B. Amounts That Are Defined as ``Indebtedness'' Under Sec.  1.6050P-
1(c) of the Existing Final Regulations but That Do Not Arise in the 
Context of a Money-Lending Transaction
    One commentator requested clarification of the information 
reporting requirements for amounts that are owed to an organization but 
that do not arise in the context of a money-lending transaction. The 
commentator suggested that the definition of indebtedness in Sec.  
1.6050P-1(c) of the existing final regulations should be revised to 
require reporting only of discharged amounts that would give rise to 
income under section 61(a)(12) and that the definition should cover 
only amounts arising in money-lending transactions. Alternatively, the 
commentator suggested that amounts owed that arise in non-money-lending 
transactions should not be ``indebtedness'' for purposes of section 
6050P unless, and until, reduced to judgment. This commentator also 
suggested that discharges of amounts such as fees, penalties, 
administrative costs, and fines should not be subject to reporting 
under section 6050P regardless of whether the transaction is a money-
lending transaction. Section 1.6050P-1(d)(3) of the existing final 
regulations provides an exception to reporting for discharges of these 
amounts only in lending transactions.
    In particular, the commentator was concerned about amounts arising 
in leasing transactions. An organization that engages only in 
transactions that are treated as leases, and not as sales, for Federal 
tax purposes is not required to report under section 6050P, because 
leasing is not lending money for purposes of section 6050P(c)(2)(D) and 
Sec.  1.6050P-2(a). However, if an organization is otherwise engaged in 
a significant trade or business of lending money and is also engaged in 
leasing transactions, the existing final regulations under section 
6050P would require the organization to report the discharge of any 
amount owed to it, including fees, administrative costs, and fines for 
the non-lending leasing transactions.
    The IRS and the Treasury Department may issue future guidance under 
section 6050P addressing the requirements for reporting amounts 
discharged in non-lending transactions. Pending issuance of future 
guidance, applicable entities will not be subject to penalties under 
section 6721 and section 6722 for failure under section 6050P to report 
amounts discharged in non-lending transactions.

Effective Date

    In order to give organizations that are subject to section 
6050P(c)(2)(D) time to comply with the reporting requirements of 
section 6050P, these regulations apply to discharges that occur on or 
after January 1, 2005.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and because the 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding this regulation was submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Drafting Information

    The principal author of these final regulations is Joseph P. 
Dewald, Office of Associate Chief Counsel (Procedure and 
Administration), Administrative Provisions and Judicial Practice 
Division. However, other personnel from the IRS and Treasury Department 
participated in the development of the regulations.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendment to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read, in part, as follows:

    Authority: 26 U.S.C. 7805. * * *
    Section 1.6050P-2 also issued under 26 U.S.C. 6050P. * * *


0
Par. 2. Section 1.6050P-0 is amended as follows:
0
1. The introductory text is amended by adding the language ``and Sec.  
1.6050P-2'' immediately after the language ``Sec.  1.6050P-1''.
0
2. The entry for Sec.  1.6050P-1 is amended by removing the word 
``financial''.
0
3. The entry for Sec.  1.6050P-1(e)(2)(v) is added.
0
4. The entries for Sec. Sec.  1.6050P-1(e)(5) through (e)(8) are 
redesignated as entries for Sec. Sec.  1.6050P-1(e)(6) through (e)(9) 
and a new entry for Sec.  1.6050P-1(e)(5) is added.
0
5. The entries for Sec.  1.6050P-2 are added.
    The additions read as follows:


Sec.  1.6050P-0  Table of contents.

* * * * *


Sec.  1.6050P-1  Information reporting for discharges of indebtedness 
by certain entities.

* * * * *
    (e) * * *
    (2) * * *
    (v) No double reporting.
* * * * *
    (5) Entity formed or availed of to hold indebtedness.
* * * * *


Sec.  1.6050P-2  Organization a significant trade or business of which 
is the lending of money.

    (a) In general.
    (b) Safe harbors.
    (1) Organizations not subject to section 6050P in the previous 
calendar year.
    (2) Organizations that were subject to section 6050P in the 
previous calendar year.

[[Page 62186]]

    (3) No test year.
    (c) Seller financing.
    (d) Gross income from lending of money.
    (e) Acquisition of an indebtedness from a person other than the 
debtor included in lending money.
    (f) Test year.
    (g) Predecessor organization.
    (h) Examples.
    (i) Effective date.

0
Par. 3. Section 1.6050P-1 is amended as follows:
0
1. The section heading for Sec.  1.6050P-1 is amended by removing the 
word ``financial''.
0
2. Paragraphs (a)(1), (b)(2)(i)(F), (c), (e)(2)(i), (e)(3), (e)(7), 
(f)(1) introductory text, (f)(1)(ii), and (f)(2) are amended by 
removing the word ``financial''.
0
3. The first sentence of paragraph (c) is amended by adding the 
language ``and Sec.  1.6050P-2'' immediately after the word 
``section''.
0
4. Paragraph (e)(2)(v) is added.
0
5. Paragraph (e)(4) is amended by removing ``6050P(c)(1)(A)'' each time 
it appears and adding ``6050P(c)(2)(A)'' in its place and by removing 
``6050P(c)(1)(C)'' and adding ``6050P(c)(2)(C)'' in its place.
0
6. Paragraphs (e)(5) through (e)(8) are redesignated as (e)(6) through 
(e)(9) and a new paragraph (e)(5) is added.
0
7. Paragraph (e)(7)(i), as redesignated, is amended by removing 
``(e)(6)'' where it appears and adding ``(e)(7)'' and paragraph 
(e)(7)(ii), as redesignated, is amended by removing ``(e)(6)(i)'' where 
it appears and adding ``(e)(7)(i)'' in its place.
0
8. Paragraph (h)(1) is amended by adding ``and, except paragraph (e)(5) 
of this section, which applies to discharges of indebtedness occurring 
after December 31, 2004.'', immediately after the language ``1994''.
    The additions read as follows:


Sec.  1.6050P-1  Information reporting for discharges of indebtedness 
by certain entities.

* * * * *
    (e) * * *
    (2) * * *
    (v) No double reporting. If multiple creditors are considered to 
hold interests in an indebtedness for purposes of this paragraph (e)(2) 
by virtue of holding ownership interests in an entity, and the entity 
is required to report a discharge of that indebtedness under paragraph 
(e)(5) of this section, then the multiple creditors are not required to 
report the discharge of indebtedness.
* * * * *
    (5) Entity formed or availed of to hold indebtedness. 
Notwithstanding Sec.  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.
* * * * *

0
Par. 4. Section 1.6050P-2 is added to read as follows:


Sec.  1.6050P-2  Organization a significant trade or business of which 
is the lending of money.

    (a) In general. For purposes of section 6050P(c)(2)(D), the lending 
of money is a significant trade or business of an organization in a 
calendar year if the organization lends money on a regular and 
continuing basis during the calendar year.
    (b) Safe harbors--(1) Organizations not subject to section 6050P in 
the previous calendar year. For an organization that was not required 
to report under section 6050P in the previous calendar year, the 
lending of money is not treated as a significant trade or business for 
the calendar year in which the lending occurs if gross income from 
lending money (as described in paragraph (d) of this section) in the 
organization's most recent test year (as defined in paragraph (f) of 
this section) is both less than $5 million and less than 15 percent of 
the organization's gross income for that test year.
    (2) Organizations that were subject to section 6050P in the 
previous calendar year. For an organization that was required to report 
under section 6050P for the previous calendar year, the lending of 
money is not treated as a significant trade or business for the 
calendar year in which the lending occurs if gross income from lending 
money (as described in paragraph (d) of this section) in each of the 
organization's three most recent test years is both less than $3 
million and less than 10 percent of the organization's gross income for 
that test year.
    (3) No test year. The lending of money is not treated as a 
significant trade or business for an organization for the calendar year 
in which the lending occurs if the organization does not have a test 
year for that calendar year.
    (c) Seller financing. If the principal trade or business of an 
organization is selling nonfinancial goods or providing nonfinancial 
services and if the organization extends credit to the purchasers of 
those goods or services to finance the purchases, then, for purposes of 
section 6050P(c)(2)(D), these extensions of credit are not a 
significant trade or business of lending money.
    (d) Gross income from lending of money. For purposes of this 
section, gross income from lending of money includes--
    (1) Income from interest, including qualified stated interest, 
original issue discount, and market discount;
    (2) Gains arising from the sale or other disposition of 
indebtedness;
    (3) Penalties with respect to indebtedness (whether or not the 
penalty is interest for Federal tax purposes); and
    (4) Fees with respect to indebtedness, including merchant discount 
or interchange (whether or not the fee is interest for Federal tax 
purposes).
    (e) Acquisition of an indebtedness from a person other than the 
debtor included in lending money. For purposes of this section, lending 
money includes acquiring an indebtedness not only from the debtor at 
origination but also from a prior holder of the indebtedness. Gross 
income arising from indebtedness is gross income from the lending of 
money without regard to who originated the indebtedness. If an 
organization acquires an indebtedness, the organization is required to 
report any cancellation of the indebtedness if the organization is 
engaged in a significant trade or business of lending money.
    (f) Test year. For any calendar year, a test year is a taxable year 
of the organization that ends before July 1 of the previous calendar 
year.
    (g) Predecessor organization. If an organization acquires 
substantially all of the property that was used in a trade or business 
of some other organization (the predecessor) (including when two or 
more corporations are parties to a merger agreement under which the 
surviving corporation becomes the owner of the assets and assumes the 
liabilities of the absorbed corporation(s)) or was used in a separate 
unit of the predecessor, then whether the organization at issue 
qualifies for one of the safe harbors in paragraph (b) of this section 
is determined by also taking into account the test years, reporting 
obligations, and gross income of the predecessor.
    (h) Examples. The rules of this section are illustrated by the 
following examples:

    Example 1. (i) Facts. Finance Company A, a calendar year 
taxpayer, was formed in Year 1 as a non-bank subsidiary of 
Manufacturing Company and has no predecessor. A lends

[[Page 62187]]

money to purchasers of Manufacturing Company's products on a regular 
and continuing basis to finance the purchase of those products. A's 
gross income from stated interest in Year 1 is $4.7 million. In Year 
1, A's gross income from fees and penalties with respect to the 
indebtedness is $0.5 million, and A has no other gross income from 
lending money within the meaning of paragraph (d) of this section.
    (ii) Results. Section 6050P does not require A to report 
discharges of indebtedness occurring in Years 1 or 2, because A has 
no test year for those years. Notwithstanding that A lends money in 
those years on a regular and continuing basis, under paragraph 
(b)(3) of this section, A does not have a significant trade or 
business of lending money in those years for purposes of section 
6050P(c)(2)(D). However, for Year 3, A's test year is Year 1. A's 
gross income from lending in Year 1 is not less than $5 million for 
purposes of the applicable safe harbor of paragraph (b)(1) of this 
section. Because A lends money on a regular and continuing basis and 
does not meet the applicable safe harbor, section 6050P requires A 
to report discharges of indebtedness occurring in Year 3.
    Example 2. (i) Facts. The facts are the same as in Example 1, 
except that A is a division of Manufacturing Company, rather than a 
separate subsidiary. Manufacturing Company's principal activity is 
the manufacture and sale of non-financial products, and, other than 
financing the purchase of those products, Manufacturing Company does 
not extend credit or otherwise lend money.
    (ii) Results. Under paragraph (c) of this section, that 
financing activity is not a significant trade or business of lending 
money for purposes of section 6050P(c)(2)(D), and section 6050P does 
not require Manufacturing Company to report discharges of 
indebtedness.
    Example 3. (i) Facts. Company B, a calendar year taxpayer, is 
formed in Year 1. B has no predecessor and a part of its activities 
consists of the lending of money. B packages and sells part of the 
indebtedness it originates and holds the remainder. B is engaged in 
these activities on a regular and continuing basis. For Year 1, the 
sum of B's gross income from sales of the indebtedness, plus other 
income described in paragraph (d) of this section, is only $4.8 
million, but it is 16% of B's gross income in Year 1.
    (ii) Results. Because B lends money on a regular and continuing 
basis and does not meet the applicable safe harbor of paragraph 
(b)(1) of this section, section 6050P requires B to report 
discharges of indebtedness occurring in Year 3. B is not required to 
report discharges of indebtedness in Years 1 and 2 because B has no 
test year for Years 1 and 2.
    Example 4. (i) Facts. The facts are the same as in Example 3. In 
addition, in each of Years 2, 3, and 4, the sum of B's gross income 
from sales of the indebtedness, plus other income described in 
paragraph (d) of this section, is less than both $3 million and 10% 
of B's gross income.
    (ii) Results. (A) Because B was required to report under section 
6050P for Year 3, the applicable safe harbor for Year 4 is paragraph 
(b)(2) of this section, which is satisfied only if B's gross income 
from lending activities for each of the three most recent test years 
is less than both $3 million and 10% of B's gross income. For Year 
4, even though B has only two test years, B's gross income in one of 
those test years, Year 1, causes B to fail to meet this safe harbor. 
Accordingly, B is required to report discharges of indebtedness 
under section 6050P in Year 4. For Year 5, B's three most recent 
test years are Years 1, 2, and 3. However, B's gross income from 
lending activities in Year 1 is not less than $3 million and 10% of 
B's gross income. Accordingly, section 6050P requires B to report 
discharges of indebtedness in Year 5.
    (B) For Year 6, B satisfies the applicable safe harbor 
requirements of paragraph (b)(2) of this section for each of the 
three most recent test years (Years 2, 3, and 4). Therefore, section 
6050P does not require B to report discharges of indebtedness in 
Year 6. Because B is not required to report for Year 6, the 
applicable safe harbor for Year 7 is the one contained in paragraph 
(b)(1) of this section, and thus the only relevant test year is Year 
5.
    Example 5. (i) Facts. (A) Company C, a calendar year taxpayer, 
was formed in Year 1 and, on a regular and continuing basis, enters 
into the following transactions with its clients, all of whom are 
unrelated parties to C. C does not have any other income.
    (B) C's clients sell goods to customers, frequently accepting as 
payment accounts receivable that are due in 30 to 90 days. Under a 
contract with each client, C investigates the creditworthiness of 
the client's customers with respect to the prospective sales, and, 
for each customer, C determines whether, and to what extent, C is 
willing to assume the risk of loss on accounts receivable to be 
issued by the customer. C's decision whether to assume risk of loss 
may be based on an evaluation of the credit quality of particular 
customers or on the aggregate credit quality of all of the client's 
prospective customers. If C is unwilling to assume the risk, the 
client either may refuse to extend any credit to the customer or may 
accept the account receivable and bear the risk of loss.
    (C) Pursuant to some contracts between C's clients and C, C's 
clients assign legal title to the accounts receivable to C when the 
accounts receivable are issued by the customers. For these accounts 
receivable, C agrees to undertake collections and to remit the 
amounts collected to the client, less a fee of 0.70 percent of the 
face value of the accounts receivable. Pursuant to other contracts 
between C's clients and C, C's clients retain legal title to the 
accounts receivable and retain the initial collection 
responsibility. For these accounts receivable, C's fee is reduced to 
0.35 percent. Both groups of accounts receivable include accounts 
receivable for which C has assumed the risk of loss and accounts 
receivable for which C has not assumed the risk of loss.
    (D) Based on all the facts and circumstances, C acquires 
ownership for Federal tax purposes of some, but not all, of the 
accounts receivable that it has agreed to collect and of some, but 
not all, of the accounts receivable for which the client has 
retained collection responsibility.
    (E) In Year 1, C's total fee income with respect to accounts 
receivable of which it acquired tax ownership was $2 million. C's 
fee income in Year 1 from accounts receivable of which it did not 
acquire tax ownership was $700,000. C does not have any other income 
for Year 1.
    (F) In Year 3, there were discharges of $950,000, representing 
$100,000 of customer defaults on those accounts receivable of which 
C was the owner for Federal tax purposes at the time of the 
identifiable event marking the discharge and $850,000 of customer 
defaults on the accounts receivable of which the clients, and not C, 
were the owner. Whenever C determined the uncollectibility of an 
account receivable for which it had not assumed the risk of loss, C 
reassigned title to the account receivable to the appropriate 
client. Each defaulting customer defaulted on an account receivable 
with an outstanding balance of at least $600.
    (ii) Results. (A) For Year 3, C's test year is Year 1. Under 
paragraph (e) of this section, C's $2 million fee income from the 
accounts receivable of which it acquired tax ownership is ``gross 
income from lending money'' for purposes of paragraph (b) of this 
section, because C was the owner of the accounts for Federal tax 
purposes. Under paragraph (e) of this section, C's $700,000 fee 
income from the accounts receivable of which it did not acquire tax 
ownership is not ``gross income from lending money'' for purposes of 
paragraph (b) of this section, because C was not the owner of the 
accounts receivable for Federal tax purposes. In Year 1, therefore, 
C's gross income from lending money is less than $5 million but is 
not less than 15% of C's gross income. Because C lends money on a 
regular and continuing basis and does not meet the applicable safe 
harbor, section 6050P requires C to report discharges of 
indebtedness occurring in Year 3.
    (B) In Year 3, section 6050P requires C to report the $100,000 
of discharges of the accounts receivable of which C was the owner 
for Federal tax purposes at the time of the identifiable event 
marking the discharge. Unless an exception to reporting under 
paragraph (b) or (c) of this section applies, section 6050P requires 
C's clients to report the $850,000 of discharges of the accounts 
receivable of which C did not become the owner.

    (i) Effective date. This section applies to discharges of 
indebtedness occurring on or after January 1, 2005.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 5. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


0
Par. 6. In Sec.  602.101, paragraph (b) is amended by removing two 
entries from the table as follows:


Sec.  602.101  OMB Control numbers.

* * * * *

[[Page 62188]]

    (b) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
 
                                * * * * *
1.6050P-1..................................................    1545-1419
1.6050P-1T.................................................    1545-1419
 
                                * * * * *
------------------------------------------------------------------------


    Approved: October 18, 2004.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Gregory F. Jenner,
Assistant Secretary of the Treasury.
[FR Doc. 04-23747 Filed 10-22-04; 8:45 am]
BILLING CODE 4830-01-P