The Internal Revenue Service decided to reconsider some of the provisions in its discharge of indebtedness rules mandating bankersparticularly commercial mortgage lendersto report debt forgiveness of $600 or more. The move comes after bankers and other financial executives expressed concern over the reporting burdens the proposal would create. Under temporary and proposed regulations issued Dec. 23, 1993, banks are required to report all debt forgiveness greater than $600 occurring after Dec. 31, 1993, to the IRS even in cases of bankruptcy. Bankers are then required to send a 1099-C, Cancellation of Debt, to the customer for the amount of forgiveness so he can pay taxes on the amount. Its like trying to squeeze blood from a turnip, David Smith, tax director of Barnett Bank, told Mortgage Marketplace. How do they think they are going to get money from someone who has declared bankruptcy? Barnett approved of the IRS move because of the associated cost savings. I think its wonderful, Smith said. We didnt have any way to track our debt forgiveness and it would have cost millions ... to set up a system. During a public meeting in Washington March 30, banking industry representatives complained about the proposal, saying it did not accomplish the services objective of taxing commercial developers who were benefiting from large amounts of debt forgiveness for real estate property. Representatives from the American Bankers Association and the Big Six accounting firms asked the IRS to exclude debt discharged in bankruptcy proceedings and to throw out the expiration of the statute of limitations. The ABA, in testimony to the IRS, recommended the regulation be redrafted to allow banks the option of reporting discharges of indebtedness in bankruptcy cases. The regulations became effective May 17, and the IRS contends it has no authority over major portions of the rule established by Congress last August. Although the IRS could not abandon the discharge of indebtedness rule altogether, it did heed the complaints and ease the burden for banks. In light of the testimony at the public hearing and the written comments received, the service has determined that interim relief from penalties for failure to comply with certain reporting requirements of the temporary regulations is warranted, IRS said. The agency decided discharges of debt occurring before Jan. 1, 1995, would have no penalties imposed for the failure to report a discharge.

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