SECTION 6. HAMP-PRA

BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA

.01 In general . The HAMP-PRA program began in the last quarter of 2010, and since that time there has been uncertainty about whether the amount of the discharge of indebtedness should be reported in the year of the permanent modification or over the Three-year Period (when the unpaid principal balance on the new mortgage loan is reduced). As a result, some HAMP-PRA borrowers have been reporting the discharge of indebtedness under

cause the remainder of the PRA Forbearance Amount is payable in this manner, that remainder is included in the issue price of the new mortgage loan.

.04 The Trial Period Conditions are reasonable closing conditions that must be satisfied before the changes to the terms of the mortgage loan become permanent. Therefore, for purposes of § 1.1001–3, the date of the modification is the date of the permanent modification.

.05 Unless an exclusion applies, the HAMP-PRA borrower includes in gross income the discharge of indebtedness income described in section 4.01 of this revenue procedure for the taxable year in which the permanent modification occurs. Under certain conditions, however, section 6 of this revenue procedure permits a borrower to report the discharge of indebtedness under HAMP-PRA over the Three-year Period. The qualified principal residence indebtedness exclusion under § 108(a)(1)(E) and the insolvency exclusion under § 108(a)(1)(B) are two exclusions that may apply to the discharge.

.06 The PRA Investor Incentive Payment is treated as a payment on the mortgage loan by the HAMP program administrator on behalf of the HAMP-PRA borrower.

.07 To the extent that the HAMP-PRA borrower uses the property as the HAMP-PRA borrower’s principal residence or the property is occupied by the HAMP-PRA borrower’s legal dependent, parent, or grandparent without rent being charged or collected, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the PRA Investor Incentive Payments that the HAMP program administrator makes to the investor in the mortgage loan. This is consistent with Rev. Rul. 2009–19, 2009–28 I.R.B. 111, which addressed the treatment of Pay-for-Performance Success Payments.

.08 To the extent that the HAMP-PRA borrower uses the property as a rental property or holds the property vacant and available for rent, the HAMP-PRA borrower includes PRA Investor Incentive Payments in gross income. If the HAMP-PRA borrower uses the cash receipts and disbursements method of accounting, then the HAMP-PRA borrower includes a PRA Investor Incentive Payment in gross income in the taxable year

in which it is applied as a payment on the HAMP-PRA borrower’s mortgage loan.

.09 As described in section 2.09 of this revenue procedure, if a HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan while the loan is in good standing and prior to completion of the Three-year Period, that payment accelerates both the reduction in the remaining PRA Forbearance Amount and the PRA Investor Incentive Payments from the HAMP program administrator. To the extent that the HAMP-PRA borrower is described in section 4.07 of this revenue procedure, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the accelerated PRA Investor Incentive Payments. To the extent that the HAMP-PRA borrower is described in section 4.08 of this revenue procedure, the HAMP-PRA borrower includes in income in the year of the acceleration the remaining amount of the PRA Investor Incentive Payment.

SECTION 5. INFORMATION-REPORTING OBLIGATIONS

.01 Under § 6050P, the investor is required to file a Form 1099-C with respect to a borrower who realizes discharge of indebtedness of $600 or more. A copy of this form is required to be furnished to the borrower.

.02 As stated in sections 4.01 and 4.04 of this revenue procedure, the HAMP-PRA discharge of indebtedness is realized at the time of the permanent modification of the mortgage loan.

.03 An investor is an applicable entity that is required under § 1.6050P–1 and this revenue procedure to issue a Form 1099-C for discharge of indebtedness. Under § 1.6050P–1(b)(2)(F), the permanent modification of a mortgage loan is an identifiable event. Identifiable events determine when Forms 1099-C have to be issued. Thus, the Form 1099-C is issued for the calendar year in which the permanent mortgage loan modification occurs. This rule under § 1.6050P–1(b)(2)(F) applies even if, under section 6 of this revenue procedure, the HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the times when the unpaid principal balance of the new mortgage loan is reduced.

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reporting exclusion of any such discharge of indebtedness. The next year, B reported on line 10(b) of the 2011 Form 982 that B filed with B’s 2011 federal income tax return a $10,000 reduction in basis in the principal residence.

For 2012, B chooses to change to reporting the discharge of indebtedness using the method described in section 6.02(1) of this revenue procedure. Thus, B files a 2012 Form 982 with B’s timely filed (including extensions) 2012 federal income tax return, and on line 10(b) of that form, B reports a $20,000 basis reduction in the principal residence ($30,000 basis reduction that B would have excluded from income in 2010 using the method described in section 6.02(1) of this revenue procedure, minus the $10,000 basis reduction that B reported on B’s 2011 Form 982).

(4) If a HAMP-PRA borrower reports the entire HAMP-PRA discharge using the method described in section 6.02(1) of this revenue procedure, and if that HAMP-PRA borrower’s mortgage loan ceases to be in good standing during the Three-year Period as described in section 2.10 of this revenue procedure, then some or all of the anticipated reductions in the PRA Adjusted Forbearance Amount will not take place. Because the amount of these anticipated reductions was not included in determining the issue price of the new mortgage loan that, pursuant to § 1.1001–3, the HAMP-PRA borrower is deemed to issue in satisfaction of the old mortgage loan, the issue price of the new mortgage loan was understated. Under these circumstances, the discharge of indebtedness income determined as of the date of the permanent modification will have been overstated.

(5) The Service will not challenge a HAMP-PRA borrower who is described in section 6.03(4) of this revenue procedure and who takes the following corrective measures:

(i) If a HAMP-PRA borrower included any of the discharge of indebtedness in gross income, the HAMP-PRA borrower may file an amended return that does not include the amount of the discharge of indebtedness that was previously reported as gross income but that, because of the HAMP-PRA borrower’s failure to keep the new mortgage loan in good standing, was not ultimately discharged. The amended return should be for the taxable year in which the income was included (that is, the year of the permanent modification), provided the applicable statute of limitations remains open for that taxable year.

(ii) If the HAMP-PRA borrower did not include any of the discharge of in

HAMP-PRA over the Three-year Period. Given the temporary nature of the program and the issuance of this guidance after participation in the program has begun, in the interests of equitable and sound tax administration, HAMP-PRA borrowers may report discharges of indebtedness under HAMP-PRA under the rules in this section 6. A HAMP-PRA borrower may choose to report discharges of indebtedness under HAMP-PRA pursuant to the rules in this section 6 only if the borrower applies the same borrower option under section 6.02 of this revenue procedure consistently to the taxable year of the permanent modification and to all subsequent taxable years. Thus, a HAMP-PRA borrower may not choose a borrower option under section 6.02 of this revenue procedure if a statute of limitations has expired for any of the taxable years that are necessary for consistent application of that option.

.02 HAMP-PRA borrower options . A HAMP-PRA borrower may treat the HAMP-PRA discharge as being realized in either of the following ways—

(1) One hundred percent of the PRA Adjusted Forbearance Amount at the time of the permanent modification; or

(2) One third of the PRA Adjusted Forbearance Amount on each of the first three annual anniversaries of the trial period plan effective date (described in section 2.06 of this revenue procedure), when, as required by the terms of the new mortgage loan, the servicer reduces the unpaid principal balance of the new mortgage loan. If some or all of the reduction in the unpaid principal balance is accelerated (as described in section 2.06 of this revenue procedure) because the HAMP-PRA borrower prepays the Non-forbearance Portion of the mortgage loan, then the HAMP-PRA discharge represented by the amount of the reduction that was accelerated is treated as being realized at the time of the accelerated reduction.

.03 HAMP-PRA borrowers who choose to realize the HAMP-PRA discharge at the time of the permanent modification .

(1) If a HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the time of the permanent modification, then for the taxable year in which the permanent modification occurs, the HAMP-PRA borrower reports on Form 982 the amount, if any, of the discharge that is excluded from gross income and in

cludes in gross income any remaining discharge.

(2) If a HAMP-PRA borrower’s mortgage loan was permanently modified under HAMP in 2010 or 2011, and if the borrower was reporting the discharge of indebtedness using the method described in section 6.02(2) of this revenue procedure, then the borrower may change to reporting the discharge of indebtedness using the method described in section 6.02(1) of this revenue procedure by filing a 2012 Form 982 with the borrower’s timely filed (with extensions) 2012 income tax return. This section 6.03(2) applies only if the change to reporting the discharge using the method described in section 6.02(1) of this revenue procedure does not change the borrower’s federal income tax liability (including any change in federal income tax liability due to a change in basis or tax attributes (under § 108(h)(1) or § 108(b))) for any taxable year prior to the borrower’s 2012 taxable year. To make this change, the borrower must—

(i) Compute the amount of discharge of indebtedness that would be included in income under § 61(a)(12) or excluded from gross income under § 108, basing the computation of the discharge on the facts as of the year of the permanent modification; and

(ii) Report on a 2012 Form 982 the reduction in basis or tax attributes (under § 108(h)(1) or § 108(b)) due to the permanent modification that the borrower would have reported on the Form 982 for the taxable year of the permanent modification, minus any reductions due to the permanent modification that the borrower actually reported on Forms 982 for taxable years prior to 2012.

(3) Example . The following example illustrates the application of section 6.03(2) of this revenue procedure.

In 2010, B’s basis in B’s principal residence was $330,000. In 2010, B’s mortgage loan on the principal residence is permanently modified under HAMP-PRA. B realized $30,000 of cancellation of indebtedness from the permanent modification, all of which qualifies for the exclusion from income for qualified principal residence indebtedness under § 108(a)(1)(E). The trial period plan effective date also fell in 2010.

B’s federal income tax return for 2010 was consistent with B’s reporting this discharge of indebtedness using the method described in section 6.02(2) of this revenue procedure. That is, B’s 2010 return did not include income from discharge of indebtedness under HAMP-PRA, nor did the return contain a Form 982

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