In Revenue Procedure 2015-57 the IRS provided relief to certain taxpayers with student loans. Specifically, the ruling provides:
- The Internal Revenue Service (IRS) will not assert that certain taxpayers, whose Federal student loans are discharged under the Department of Education’s “Defense to Repayment” discharge process, must recognize gross income as a result of this discharge process.
- Identifies the statutory provisions under which taxpayers whose Federal student loans are discharged under the Department of Education’s “Closed School” discharge process may exclude the discharged amount from gross income.
- The IRS will not assert that these taxpayers must increase their taxes owed in the year of a discharge as a result of either discharge process if in a prior taxable year they
- Received an education credit under section 25A (Hope and Lifetime Learning Credits) or
- Took a deduction under section 221 (interest on education loans) or section 222 (qualified tuition and related expenses) of the Internal Revenue Code (Code).
The Department of Education has begun a program for settling and discharging student loans taken out to finance attendance at schools owned by Corinthian College as described in the Department’s Fact Sheet: Protecting Students from Abusive Career Colleges (June 8, 2015).
The discharges, which may affect 50,000 students, will be under one of two programs:
· The Closed School discharge process, or
· The Defense to Repayment discharge process based on misrepresentations made by the colleges.
The Higher Education Act of 1965 (HEA) provides a statutory exclusion from gross income of debts discharged in the Closed School program, thus any debt discharged under that program will not be taxable.
There is no similar exclusion in the HEA for debt discharged under the Defense to Repayment program. In such a case any exclusion from income has to be based under other criteria.
The Revenue Procedure notes:
Section 61(a)(12) of the Code provides that gross income includes income from the discharge of indebtedness. There are, however, exceptions under which a taxpayer may not be required to include income from the discharge of indebtedness in gross income. The availability of these exceptions depends on a variety of factors, such as the circumstances of the loan’s origination and the borrower’s financial situation at the time of the loan’s discharge. In some cases, a discharge may result in an increase in gross income under the tax benefit rule, or an increase in tax liability due to a recapture of credits.
While the IRS believes the vast majority of those receiving discharge under the Defense to Repayment program would eventually be found to qualify for relief under some authority, but it would normally require a fact intensive inquiry in each case.
Thus, to simplify matters, the IRS has provided general relief to those covered by the procedure.
Those covered by the procedure are noted as:
… any taxpayer who took out Federal student loans to finance attendance at a school owned by Corinthian Colleges, Inc. that are discharged under the Closed School discharge process or the Defense to Repayment discharge process.
For those taxpayers the IRS will not assert cancellation of debt income for individuals with debts due to Corinthian Colleges that are discharged under the Defense to Repayment program.
As well, the IRS grants the following education credit/deduction relief:
The IRS will not assert that a taxpayer within the scope of this revenue procedure must increase his or her taxes owed in the year of a discharge, or in a prior year, as a result of either discharge process if in a prior year he or she received an education credit under section 25A attributable to payments made with proceeds of the discharged loan. In addition, the IRS also will not assert that a taxpayer within the scope of this revenue procedure must increase his or her income in the year of the discharge if he or she took a deduction under section 221 in a prior year attributable to interest paid on a discharged loan or a deduction under section 222 in a prior taxable year attributable to payments of qualified tuition and related expenses made with proceeds of the discharged loan.