Waiver of Repayment of Excess Pension Payment Not Taxable as Cancellation of Indebtedness

In Private Letter Ruling 201743011 a taxpayer sought clarification that he would not end up having to effectively report the same income twice despite receiving information returns in different years that reported what was the same income.

The taxpayer had received payments from a pension plan to which the taxpayer had made after-tax contributions for several years.  The taxpayer reported his payments using the simplified safe harbor method of reporting his income pursuant to Notice 88-118, determining the taxable portion of each payment and the amount that represented a nontaxable return of capital.

Eventually the taxpayer was notified that the plan had determined he had been paid more from the plan than he should have received due to systemic errors made many years before.  The letter indicated that his payments were scheduled to be reduced in the future to recover this overpayment.  However, the plan had the discretion to waive the overpayment if the recipient satisfied certain criteria.

The plan determined that the taxpayer met the criteria and thus waived any repayment of the overpayment to be made by the taxpayer.  Due to having waived the repayment, the plan is going to furnish the taxpayer a Form 1099C, Cancellation of Debt showing the overpayment as cancellation of debt income.

As the taxpayer had already reported a portion of the amounts in question as income, the question naturally arises about whether the taxpayer is going to end up having to report that same amount again as income. The taxpayer asked for a private letter ruling providing that he did not have taxable income from the plan’s waiver of repayment.

The IRS agreed that that the taxpayer was correct.  As the ruling notes:

Ordinarily, you would be obligated to repay the amount of the $x pension overpayment. The Department, however, waived the collection of the overpayment, which it is authorized to do. The $x discharge of indebtedness is not gross income under § 61 because you accounted for all your pension payments under the Pension Plan (including the $x overpayment) under Notice 88-118 as you received them.