New Tax Rule Promises Nightmare for Lenders

By Thompson, Don | American Banker, April 12, 1985 | Go to article overview

New Tax Rule Promises Nightmare for Lenders


Thompson, Don, American Banker


AN OBSCURE PROVISION of the Deficit Reduction Act of 1984 promises to be a record-keeping and reporting nightmare for banks, savings and loan associations, insurance companies, securities firms, and other financial institutions.

This new section of the Internal Revenue Code (Section 6050J) requires any lender that lends money secured by property and that forecloses on that property after Dec. 31, 1984, to file an information return with the Internal Revenue Service. The new law also requires the filing of an information return if the lender "has reason to know" that property held as security for a debt has been abandoned.

The only exception to the filing requirement is for certain consumer loans, i.e., loans to individuals secured by tangible personal property that is not held for investment and not used in a trade or business. An additional proposed exception, which would have omitted the reporting requirement for debts of less than $15,000, was contained in the Senate version of the 1984 tax act. This was dropped from the version signed by the President.

The information required to be set forth in the return filed with the Internal Revenue Service includes:

* The name, address, and taxpayer identification number of the debtor.

* A description of the property securing the debt.

* A statement of whether the debt is recourse of nonrecourse and, if the debt is recourse, the fair market value of the property.

* The date on which the lender foreclosed on the property or on which it was abandoned.

* The amount of debt on the date of the foreclosure and the amount satisfied by the foreclosure.

The Internal Revenue Service has prescribed temporary regulations that clarify some ambiguities of the new law while setting forth some additional requirements. The most significant of these are as follows:

* In the case of corporate and municipal bonds, fixed investment trusts, and similar investment vehicles, the trustee or person acting in a similar capacity is treated as the "lender" and must file the required return in the event of a foreclosure.

* The reporting requirement applies in the case of a debt secured by a personal residence, such as a conventional home mortgage.

In the case of multiple lenders, each lender must report the foreclosure. For example, where a first mortgagee forecloses on property subject to two mortgages, the second mortgagee must report the foreclosure, even if all of the proceeds are paid over to the first mortgagee.

The law imposes a penalty of $50 on any lender that fails to file the required return, subject to a maximum of $50,000 per year per institution, unless there is "reasonable cause" for the failure. If the failure is due to intentional disregard of the filing requirements, however, more severe penalties apply. …

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