Joint Committee on Taxation
February 10, 1992
JICX-3-92

COMMITTEE ON WAYS AND MEANS
MARK-UP OF H.R. 939
(VETERANS' HOUSING AMENDMENTS OF 1991)
ON FEBRUARY 12, 1992

I. Legislative Background

H.R. 939 (the Veterans' Housing Amendments of 1991) was
reported by the House Committee on Veterans’ Affairs on
November 6, 1991 (H. Rept. 102-292, Part I). Section 5 of
the bill as reported by that committee would clarify the tax
treatment of certain waivers and settlements of veterans’
indebtedness granted by the Department of Veterans Affairs
(the "VA"). (In general, veterans' indebtedness is created
when: (1) a veteran receives compensation, pension,
education, or vocational rehabilitation benefits to which the
veteran is not entitled or (2) a veteran defaults ona
VA-guaranteed home loan.)

H.R. 939 has been sequentially referred to the Committee
on Ways and Means for a period ending February 28, 1992.
This document provides a description of the relevant present
law, the tax-related provisions included in H.R. 939 as
reported by the Committee on Veterans' Affairs, and a
possible option for consideration by the Committee on Ways
and Means.

II. Description of Tax~Related Provisions of
H.R. 939, as Reported by the Committee on Veterans' Affairs

Present Law

In 1986, Internal Revenue Code section 134 was enacted
to consoljdate and set forth the tax treatment of military
benefits. Under this section, qualified military benefits
are excludable from gross income. Any benefits for current
or former military personnel that are not expressly excluded
under section 134, or under another section of the Code
(e.g., the fringe benefit exclusions of section 132), are
includible in gross income.

The term "qualified military benefit" generally means

1 P.L. 99-514, See H. Rep. 99-841, Vol. II, September 18,
1986, pp. 548-549 (Conference Report).



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any allowance or in-kind benefit that:

. (1) is received ‘by any member or’ former member (or by a
dependent) of the uniformed services of the United States by
reason of the member's status or service as a member of the
uniformed services; and

(2) was excludable from gross income under a
non-Internal Revenue Code provision of law, regulation, or
adminjstrative practice that was in effect on September 9,
1986.

Under Title 38 of the United States Code (Veterans
Benefits), as in effect on September 9, 1986, the payment of
benefits to a beneficiary pursuant to any of the veterans'
laws is exempt from taxation. As a result, an allowance or
in-kind benefit that could be classified as a “payment of
benefits" as of September 9, 1986 is excludable from income
under Internal Revenue Code section 134.

Present law is unclear on whether waivers and
settlements of veterans' indebtedness are “payment of
benefits." If these waivers and settlements are "payment of
benefits," they would be "qualified military benefits"
excludable from income under Internal Revenue Code section
134. On the other hand, if these waivers and settlements are
not "payment of benefits," they would be treated as
discharges of indebtedness.

Discharges of indebtedness generally are includible as
income under Internal Revenue Code section 61(a)(12), except
when the taxpayer is insolvent or in bankruptcy (sec.
108(a)). The IRS, in a private letter ruling, also has held
that certain waivers of debt arising from VA-guaranteed home
loans that have been assumed are excludable. In the ruling,
a veteran with a VA-guaranteed home loan sold his home and
the purchaser of the home assumed the mortgage. After the
purchaser defaulted on the loan, the VA sustained a loss and
held the veteran liable. The VA waived the veteran's
liability, which created discharge of indebtedness to the
veteran. Under these facts, the IRS held the discharge of
indebtedness excludable from income.

The exclusion from discharge of indebtedness income in
assumed~loan cases might be justified under several possible
legal theories. Present law is unclear on which, if any, of
these legal theories is applicable to the assumed-loan cases.

2 Thus, “qualified military benefits" generally are
excludable only to the extent and scope of the amount
authorized on September 9, 1986. See H. Rep. 99-841, Vol.
II, September 18, 1986, p. 548 (Conference Report).



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Explanation of Provisions

Section 5 of H.R. 939, as reported, amends Title 38
(U.S. Code) to treat as "payment of benefits" the waiver of
recovery of a payment or an overpayment of a benefit provided
under any of the laws administered by the VA, and the
forgoing of collection by the United States in the settlement
of a claim with respect to any benefit provided to a veteran
or other eligible person under any of the laws administered
by the VA.

H.R. 939, as reported, would apply to waivers that were
made, and amounts that were forgone, before, on, or after,
the date of enactment.

III. Possible Option

Amend the Internal Revenue Code to clarify that waivers
and settlements of veterans' indebtedness for certain
VA-guaranteed home loans are excludable from income. The
exclusion would apply only where a veteran with a
VA-guaranteed home loan sold his or her home and the
purchaser of the home assumed the mortgage. In these
instances, if the purchaser defaulted, and the VA paid off
the loan, any waiver or settlement of the liability of the
veteran would be excludable from the veteran's income.

This clarification would apply to waivers that are made,
and amounts that are forgone, on or after the date of
enactment. No inference would be intended with respect to
the proper interpretation of present law.