Instructions For Forms 1099-A And 1099-C - 2006 (Page 5 of 27) in pdf

instance, the transferee entity (including real estate mortgage

2. A cancellation or extinguishment making the debt

investment conduits (REMICs) and pass-through securitized

unenforceable in a receivership, foreclosure, or similar federal

indebtedness arrangements) may be required to report

or state court proceeding.

cancellation of indebtedness on Form 1099-C. See Regulations

3. A cancellation or extinguishment when the statute of

section 1.6050P-1(e)(5).

limitations for collecting the debt expires, or when the statutory

period for filing a claim or beginning a deficiency judgment

Test year defined. A test year is a taxable year of the

proceeding expires. Expiration of the statute of limitations is an

organization that ends before July 1 of the previous calendar

identifiable event only when a debtor’s affirmative statute of

year. For example, X, a calendar year taxpayer who has a

limitations defense is upheld in a final judgment or decision of a

significant trade or business of lending money, is formed in year

court and the appeal period has expired.

one. X will not have a test year in year one or year two.

4. A cancellation or extinguishment when the creditor elects

However, for year three, X’s test year will be year one. In year

foreclosure remedies that by law end or bar the creditor’s right

three, year one is the only year that ended before July 1 of the

to collect the debt. This event applies to a mortgage lender or

previous calendar year (in this example, year two).

holder who is barred by local law from pursuing debt collection

Penalties. See part O in the 2006 General Instructions for

after a “power of sale” in the mortgage or deed of trust is

Forms 1099, 1098, 5498, and W-2G.

exercised.

5. A cancellation or extinguishment due to a probate or

Amounts discharged in nonlending transactions. Until

similar proceeding.

further guidance is issued, no penalty will apply for failure to file

6. A discharge of indebtedness under an agreement

Form 1099-C, or provide statements to debtors, for amounts

between the creditor and the debtor to cancel the debt at less

discharged in nonlending transactions.

than full consideration.

Amounts forgiven pursuant to the terms of a debt

7. A discharge of indebtedness because of a decision or a

obligation. Until further guidance is issued, no penalty will

defined policy of the creditor to discontinue collection activity

apply for failure to file Form 1099-C, or provide statements to

and cancel the debt. A creditor’s defined policy can be in writing

debtors, for amounts forgiven pursuant to the terms of a debt

or an established business practice of the creditor. A creditor’s

obligation.

practice to stop collection activity and abandon a debt when a

Multiple creditors. If a debt is owned (or treated as owned for

particular nonpayment period expires is a defined policy.

federal income tax purposes) by more than one creditor, each

8. The expiration of nonpayment testing period. This event

creditor that is described under Who Must File on page AC-2

occurs when the creditor has not received a payment on the

must issue a Form 1099-C if that creditor’s part of the canceled

debt during the testing period. The testing period is a 36-month

debt is $600 or more. To meet this requirement, a lead bank,

period ending on December 31 plus any time when the creditor

fund administrator, or other designee of the creditor may file a

was precluded from collection activity by a stay in bankruptcy or

single Form 1099-C reporting the aggregate canceled debt or

similar bar under state or local law. The creditor can rebut the

may file Form 1099-C for that creditor’s part of the canceled

occurrence of this identifiable event if:

debt. Use any reasonable method to determine the amount of

a. The creditor (or a third-party collection agency) has

each creditor’s part of the canceled debt.

engaged in significant bona fide collection activity during the

Debt owned by a partnership is treated as owned by the

12-month period ending on December 31 or

partners and must follow the rules for multiple creditors.

b. Facts and circumstances that exist on January 31

Pass-throughs and REMICs. Until further guidance is issued,

following the end of the 36-month period indicate that the debt

no penalty will apply for failure to file Form 1099-C, or provide

was not canceled.

statements to debtors, for a canceled debt held in a

Significant bona fide collection activity does not include

pass-through securitized debt arrangement or held by a

nominal or ministerial collection action, such as an automated

REMIC. However, see item 3 under Safe harbor rules on page

mailing. Facts and circumstances indicating that a debt was not

AC-2.

canceled include the existence of a lien relating to the debt (up

to the value of the security) or the sale or packaging for sale of

A pass-through securitized debt arrangement is any

the debt by the creditor.

arrangement in which one or more debts are pooled and held

for 20 or more persons whose interests in the debt are

Exceptions

undivided co-ownership interests that are freely transferable.

Co-ownership interests that are actively traded personal

You are not required to report on Form 1099-C the following:

property (as defined in Regulations section 1.1092(d)-1) are

1. Certain bankruptcies. You are not required to report a

presumed to meet these requirements.

debt canceled in bankruptcy unless you know from information

Debt Defined

included in your books and records that the debt was incurred

for business or investment purposes. If you are required to

A debt is any amount owed to you including stated principal,

report a business or investment debt canceled in bankruptcy,

stated interest, fees, penalties, administrative costs, and fines.

report it for the later of:

The amount of debt canceled may be all or only part of the total

a. The year in which the amount of canceled debt first can

amount owed. However, for a lending transaction, you are

be determined or

required to report only the stated principal. See Exceptions

b. The year in which the debt is canceled in bankruptcy.

below.

A debt is incurred for business if it is incurred in connection

When To File

with the conduct of any trade or business other than the trade

Generally, file Form 1099-C for the year in which an identifiable

or business of performing services as an employee. A debt is

event occurs. See Exceptions below. If you cancel a debt

incurred for investment if it is incurred to purchase property held

before an identifiable event occurs, you may choose to file

for investment (as defined in section 163(d)(5)).

Form 1099-C for the year of cancellation. No further reporting is

2. Interest. You are not required to report interest. However,

required even if a second identifiable event occurs on the same

if you choose to report interest as part of the canceled debt in

debt. Also, you are not required to file an additional or corrected

box 2, you must show the interest separately in box 3.

Form 1099-C if you receive payment on a prior year debt.

3. Nonprincipal amounts. Nonprincipal amounts include

penalties, fines, fees, and administrative costs. For a lending

When Is a Debt Canceled

transaction, you are not required to report any amount other

A debt is canceled on the date an identifiable event occurs. An

than stated principal. A lending transaction occurs when a

identifiable event is:

lender loans money to, or makes advances on behalf of, a

1. A discharge in bankruptcy under Title 11 of the U.S.

borrower (including revolving credit and lines of credit). For a

Code for business or investment debt (see Exceptions on this

nonlending transaction, nonprincipal amounts are included in

page).

the debt. However, until further guidance is issued, no penalties

AC-3

Instructions For Forms 1099-A And 1099-C - 2006 Page 5

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