SECTION 1. PURPOSE

This revenue procedure extends the relief provided under Rev. Proc. 2015–57, 2015–51 I.R.B. 863, to taxpayers who took out Federal student loans to finance attendance at a school owned by American Career Institutes, Inc. (ACI) and whose Federal student loans are discharged under the Department of Education’s “Defense to Repayment” or “Closed School” discharge process.

This revenue procedure provides that the Internal Revenue Service (IRS) will not assert that these taxpayers must recognize gross income as a result of the Defense to Repayment discharge process or increase gross income by the amount of certain tax credits or deductions related to loans discharged under either process and will not assert that the creditor must file information returns and furnish payee statements as a result of discharging these loans. This revenue procedure also modifies Rev. Proc. 2015–57 to provide that the IRS will not assert that creditors under that revenue procedure must file information returns and furnish payee statements as a result of discharges under that revenue procedure.

February 13, 2017 916 Bulletin No. 2017–7

discharge of indebtedness in gross income.

Section 6050P of the Code requires any applicable entity which discharges the indebtedness (in whole or in part) of any person to make an information return and furnish a payee statement for that discharge of indebtedness. The regulations in 26 C.F.R. § 1.6050P–1 provide that reporting is required only upon the occurrence of one of the identifiable events enumerated in the regulations.

.02 Borrowers participating in Closed School discharge process .

The HEA provides statutory exclusions from gross income for Federal student loans discharged under the Closed School discharge process. 20 U.S.C. §§ 1087(c), 1087dd(g), 1087e(a)(1). Accordingly, a taxpayer whose Federal student loan is discharged under the Closed School discharge process will not recognize gross income as a result of the discharge, and the taxpayer should not report the amount of the discharged loan in gross income on his or her Federal income tax return.

.03 Borrowers participating in Defense to Repayment discharge process .

The HEA does not provide a statutory exclusion from gross income for Federal student loans discharged under the Defense to Repayment discharge process. However, a taxpayer may be able to exclude amounts discharged under this process from gross income under a provision of the Code or other tax law authorities.

For example, a borrower that has a liability reduced because of a legal infirmity that relates back to the original sale transaction (for example, fraud) may not have gross income to the extent of the debt reduction. This rule requires a caseby-case analysis of each transaction.

In addition, section 108(a)(1)(B) of the Code provides that a taxpayer may exclude from gross income a discharge of indebtedness that occurs when the taxpayer is insolvent (the insolvency exclusion).

The Treasury Department and the IRS conclude that most borrowers whose Federal student loans taken out by taxpayers

to finance attendance at a school owned by ACI that are discharged under the Defense to Repayment discharge process would be able to exclude from gross income all or substantially all of the discharged amounts based on fraudulent or material misrepresentations made by the schools owned by ACI to the students or based on the insolvency exclusion or another tax law authority. Accordingly, the IRS will not assert that a taxpayer within the scope of this revenue procedure recognizes gross income as a result of the Defense to Repayment discharge process. Further, the IRS will not assert that creditors within the scope of this revenue procedure must report under section 6050P regarding these discharges.