rp-13-16.pdf

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CFR 601.105: Examination of returns and claims for refund, credit, or
abatement; determination of correct tax liability.
(Also Part I, §§ 61, 108, 451, 6041, 6050P; 1.1001-3)

Rev. Proc. 2013-16

SECTION 1. PURPOSE
This revenue procedure provides guidance to mortgage loan holders, loan
servicers, and borrowers who are participating in the Department of the
Treasury’s (Treasury) and Department of Housing and Urban Development’s
(HUD) Home Affordable Modification Program
®
(HAMP
®
). Under HAMP, a
borrower may be eligible for principal reduction of the outstanding balance of a
qualifying mortgage pursuant to the program’s Principal Reduction Alternative
SM

(PRA). In appropriate cases, HAMP has been offering the PRA as part of a
HAMP loan modification since the last quarter of 2010. Current plans call for
HAMP to continue accepting new borrowers through the end of 2013. The
Internal Revenue Service (Service) is providing this guidance to address the tax
consequences for borrowers (HAMP-PRA borrowers) who are participating in the
PRA and the reporting obligations for participating mortgage loan holders and
servicers.

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SECTION 2. BACKGROUND—HAMP AND THE HAMP PRINCIPAL
REDUCTION ALTERNATIVE
.01 To help distressed borrowers lower their monthly mortgage payments,
Treasury and HUD established HAMP for mortgage loans that are not owned or
guaranteed by the Federal National Mortgage Association (Fannie Mae) or the
Federal Home Loan Mortgage Corporation (Freddie Mac). A description of the
program can be found at www.makinghomeaffordable.gov
.
.02 Under HAMP, a participating loan servicer, acting on behalf of the
mortgage loan holder, must consider a sequence of modification steps for each
eligible borrower’s mortgage loan until the borrower’s monthly payment is
reduced to a monthly payment amount determined under the HAMP guidelines.
These steps include a reduction in the mortgage loan’s interest rate, an
extension of the mortgage loan’s term, and a reduction in the mortgage loan’s
principal balance.
.03 In some cases, the unpaid principal balance of the modified mortgage
loan is divided into (1) an amount that bears stated interest and that is used to
calculate the borrower’s new monthly mortgage payment (the “Non-forbearance
Portion”), and (2) a forbearance amount, which does not bear stated interest and
on which periodic payments of stated principal are not required. The stated
principal of the forbearance amount is due upon the earliest of the borrower’s
transfer of the property, payoff of the balance on the Non-forbearance Portion of
the mortgage loan, or maturity of the mortgage loan. However, as noted in
section 2.06 of this revenue procedure, a HAMP-PRA borrower sometimes may

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not have to pay all or a portion of the forbearance amount. (The forbearance
amount associated with a HAMP-PRA principal reduction is called the “PRA
Forbearance Amount.”)
.04 If a mortgage loan is being considered for a HAMP modification and
the amount owed on the mortgage loan is greater than 115 percent of the value
of the property, then the servicer must consider whether principal reduction under
PRA should be used as part of the HAMP modification.
.05 The first step toward a HAMP modification is a trial period plan, in
which the borrower’s monthly mortgage payment is set at a monthly payment
amount determined under the HAMP guidelines. The trial period plan effective
date is the due date for the first of the reduced payments that are to be made
under the trial period plan. (It is the first day of either the first or the second
month after the servicer transmits the trial period notice to the borrower.) In
general, the trial period is three months, and, during this period, the borrower
must satisfy certain conditions before the changes to the terms of the mortgage
loan become permanent (the “Trial Period Conditions”). Specifically, depending
on the borrower’s trial period payment history, the borrower’s compliance with
HAMP and servicer guidelines, and his or her satisfaction of all other Trial Period
Conditions, the borrower will be offered a permanent modification of the terms of
the mortgage loan, including monthly mortgage payments that are lower than
those under the old mortgage loan. Until the effective date of a permanent
modification, the terms of the existing mortgage loan continue to apply.

4
.06 After the mortgage loan is permanently modified under HAMP, if the
modified mortgage loan is in good standing on the first, second, or third annual
anniversary of the trial period plan effective date (the “Three-year Period”), the
servicer must reduce the unpaid principal balance of the mortgage loan on the
respective anniversary date by one-third of the initial PRA Forbearance Amount.
(The servicer allocates the entire reduction to the remaining PRA Forbearance
Amount.) In general, if a HAMP-PRA borrower’s mortgage loan is in good
standing and if the HAMP-PRA borrower pays in full the Non-forbearance Portion
of the mortgage loan prior to the reduction of the entire PRA Forbearance
Amount, the servicer must reduce the remaining outstanding principal balance of
the mortgage loan by the remaining PRA Forbearance Amount.
.07 In connection with every HAMP loan modification, the HAMP program
administrator (acting on behalf of the federal government) provides incentives to
the borrower, the servicer, and the investor (that is, the holder of the mortgage
loan). If a HAMP loan modification includes a PRA principal reduction, the
HAMP program administrator makes additional incentive payments to the
investor. These additional incentives are called “PRA Investor Incentive
Payments” and are generally spread over three years. The size of the PRA
Investor Incentive Payments depends on the amount of principal reduced, the
loan-to-value ratio at the time of the HAMP modification, and the loan’s payment
history before the modification. The PRA Investor Incentive Payments range
from 18 to 63 percent of the principal amounts reduced. For purposes of this
revenue procedure, the excess of the initial PRA Forbearance Amount of a

5
mortgage loan over the aggregate PRA Investor Incentive Payments scheduled
to be paid with respect to that loan is called the “PRA Adjusted Forbearance
Amount.”
.08 A PRA Investor Incentive Payment is earned by the investor on each
date on which the servicer reduces the unpaid principal balance of the mortgage
loan by a portion of the PRA Forbearance Amount (generally, on the first three
annual anniversaries of the trial period plan effective date).
.09 If a HAMP-PRA borrower’s early payment in full of the Non-
forbearance Portion of the mortgage loan accelerates the reduction of the
remaining PRA Forbearance Amount (described above in section 2.06 of this
revenue procedure), the remaining PRA Investor Incentive Payments from the
HAMP program administrator are also accelerated.
.10 If, prior to completion of the Three-year Period, a mortgage loan
ceases to be in good standing because of the HAMP-PRA borrower’s payment
history, then the remaining PRA Forbearance Amount is not further reduced and
is due when the HAMP-PRA borrower transfers the property, the HAMP-PRA
borrower refinances, or otherwise pays off the Non-forbearance Portion of the
mortgage loan, or the mortgage loan matures.
SECTION 3. BACKGROUND—APPLICABLE PROVISIONS OF LAW
.01 Under § 61 of the Internal Revenue Code, except as otherwise
provided in subtitle A, gross income means all income from whatever source
derived, including income from discharge of indebtedness. See § 61(a)(12).

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.02 Under § 1.1001-3 of the Income Tax Regulations, if a debt instrument
undergoes a significant modification, then the modification results in an exchange
of the original debt instrument for the modified debt instrument. In general, an
agreement to change a term of a debt instrument is a modification at the time the
borrower and holder enter into the agreement, even if the change in term is not
immediately effective. However, if the change is conditioned on reasonable
closing conditions, a modification occurs on the closing date of the agreement.
See § 1.1001-3(c)(6).
.03 Under § 108(e)(10), in the case of a debt-for-debt exchange (including
a deemed exchange under § 1.1001-3), the borrower is treated as having
satisfied the original debt instrument with an amount of money equal to the issue
price of the new debt instrument. If the amount of debt satisfied in this manner
exceeds that issue price, the borrower realizes discharge of indebtedness
income on the exchange. See also § 1.61-12(c).
.04 The issue price of a non-publicly traded debt instrument issued for
non-publicly traded property generally reflects the amount of principal that the
borrower is required to pay to the holder of the instrument. If a borrower has the
ability to avoid paying certain amounts (including principal) without violating the
terms of the instrument, the payment schedule for the instrument is generally
determined based on an assumption that the borrower will avoid any requirement
to make those payments. See, e.g., §§ 1.1272-1(c)(5) and 1.1274-2(d).
.05 Under § 108(a), gross income does not include any amount that but
for § 108(a) would be includible in gross income by reason of the discharge (in

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whole or in part) of a taxpayer’s indebtedness if (1) the indebtedness discharged
is qualified principal residence indebtedness that is discharged before January 1,
2014, or (2) the discharge occurs when the taxpayer is insolvent. Section
108(a)(1)(E) and 108(a)(1)(B). (Although § 108 contains other exclusions as
well, this revenue procedure focuses on these two exclusions because they are
the most likely to apply to the greatest number of HAMP-PRA borrowers.)
.06 Under §§ 108(h) and 163(h)(3)(B), qualified principal residence
indebtedness is any indebtedness that is incurred by a borrower to buy, build, or
substantially improve the borrower’s principal residence and is secured by that
residence.
.07 Qualified principal residence indebtedness also includes a loan
secured by the borrower’s principal residence that refinances qualified principal
residence indebtedness, but only to the extent of the amount of the refinanced
indebtedness. See §§ 108(h) and 163(h)(3)(B)(i).
.08 The maximum amount of discharged indebtedness that a borrower
may exclude from gross income under the qualified principal residence
indebtedness exclusion is $2,000,000 ($1,000,000 for a married individual filing a
separate return). Under § 108(h)(4), if only part of the discharged indebtedness
is qualified principal residence indebtedness, then the exclusion applies only to
the amount of the discharged indebtedness that exceeds the amount of the loan
(determined immediately before the discharge) that is not qualified principal
residence indebtedness.

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.09 Under § 108(a)(3), the insolvency exclusion applies to the lesser of
the amount of the debt discharged or the amount by which the taxpayer is
insolvent immediately before the discharge.
.10 Section 108(d)(3) provides that, for purposes of the insolvency
exclusion, a taxpayer is insolvent to the extent that the taxpayer’s total liabilities
exceed the fair market value of all of the taxpayer’s assets immediately before
the discharge of indebtedness. Under § 108(a)(2)(C), the qualified principal
residence indebtedness exclusion takes precedence over the insolvency
exclusion when both exclusions apply to discharged indebtedness, unless the
taxpayer elects to apply the insolvency exclusion.
.11 If an amount is excluded from gross income as a discharge of
qualified principal residence indebtedness, the taxpayer must reduce the basis of
the taxpayer’s principal residence. See § 108(h)(1). If a discharged amount is
excluded from gross income because the taxpayer was insolvent when the
discharge occurred, the taxpayer must reduce certain tax attributes (possibly
including basis). See § 108(b). For further discussion of income from the
discharge of indebtedness, the qualified principal residence indebtedness
exclusion, the insolvency exclusion, and other exclusions from gross income that
may apply, see Publication 4681, Canceled Debts, Foreclosures,
Repossessions, and Abandonments (for Individuals).
.12 Taxpayers who exclude any discharged amounts from gross income
report both the exclusion and the resulting reduction in basis or other tax
attributes on Form 982, Reduction of Tax Attributes Due to Discharge of

9
Indebtedness (and Section 1082 Basis Adjustment). See Form 982 instructions
and Publication 4681. This form is to be filed with the tax return for the taxable
year in which the amount is discharged but is excluded from gross income.
.13 Governmental payments made to or on behalf of individuals or other
persons are included within the broad definition of gross income under § 61
unless an exception applies. See Notice 2003-18, 2003-1 C.B. 699, and Rev.
Rul. 79-356, 1979-2 C.B. 28. However, if disbursements are made by a
governmental unit to individuals in the interest of the general welfare (that is, are
generally based on individual or family need) and the disbursements do not
represent compensation for services, then the amounts disbursed are excluded
from the income of the recipient (general welfare exclusion). See Rev. Rul.
2005-46, 2005-2 C.B. 120, and Rev. Rul. 75-246, 1975-1 C.B. 24.
.14 Under § 451 and § 1.451-1(a), a taxpayer that uses the cash receipts
and disbursements method of accounting includes income in gross income when
the taxpayer actually or constructively receives the income.
.15 Section 6041 requires every person engaged in a trade or business
(including the United States and its agencies) to (1) file an information return
(Form 1099–MISC, Miscellaneous Income, is used for this purpose) for each
calendar year in which the person makes, in the course of its trade or business,
payments to another person of fixed or determinable income aggregating $600 or
more, and (2) furnish a copy of the information return to that other person. See
§ 6041(a) and (d) and § 1.6041-1(a)(1) and (b).

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.16 Section 6050P requires applicable entities (including the United
States and its agencies, financial entities, and any organization a significant trade
or business of which is the lending of money) to (1) file an information return
(Form 1099–C, Cancellation of Debt, is used for this purpose) for each calendar
year in which it discharges indebtedness of another person of $600 or more, and
(2) furnish a copy of the information return to that other person. See § 6050P(a)-
(c) and §§ 1.6050P-1(a) and 1.6050P-2(a) and (d).
.17 Section 6721 imposes penalties with respect to information returns
required to be filed with the Service. These penalties apply in the case of a
failure to timely file an information return, a failure to include all required
information on the return, or the inclusion of incorrect information on the return.
Section 6724(d)(1) includes Forms 1099–MISC and 1099–C in the term
“information return.”
.18 Section 6722 imposes penalties with respect to payee statements
required to be furnished to payees. These penalties apply in the case of a failure
to timely furnish a payee statement, a failure to include all required information
on the statement, or the inclusion of incorrect information on the payee
statement. Section 6724(d)(2) includes in the term “payee statement” copies of
Forms 1099–MISC and 1099–C that are required to be furnished to taxpayers.
SECTION 4. FEDERAL INCOME TAX TREATMENT
.01 Because a HAMP modification with a PRA principal reduction is a
significant modification, it results in a deemed debt-for-debt exchange in which
the HAMP-PRA borrower satisfies the old mortgage loan by issuing a new one.

11
See § 1.1001-3. At the time of the modification, therefore, under § 108 and this
revenue procedure, the HAMP-PRA borrower realizes discharge of indebtedness
income equal to any excess of the adjusted issue price of the old mortgage loan
(which was satisfied in the deemed exchange) over the issue price of the new
(post-modification) mortgage loan. See also § 61(a)(12) and § 1.61-12(c).
.02 A HAMP-PRA borrower has the ability to avoid payment of the PRA
Adjusted Forbearance Amount. Because the HAMP-PRA borrower has this
ability, that amount should not be taken into account in determining the issue
price of the new mortgage loan. Because the issue price of the new mortgage
loan does not include the PRA Adjusted Forbearance Amount, the PRA Adjusted
Forbearance Amount contributes to the excess of the adjusted issue price of the
old mortgage loan (which was satisfied in the deemed exchange) over the issue
price of the new mortgage loan.
.03 On the other hand, the investor has not given up its right to receive
the remainder of the PRA Forbearance Amount, because the HAMP program
administrator is expected to make those payments on the HAMP-PRA borrower’s
behalf by making the PRA Investor Incentive Payments. Because 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.

12
.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

13
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.

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.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.
.04 The investor (or the loan servicer acting on behalf of the investor)
reports the full amount of the discharge on the Form 1099-C regardless of
whether some or all of the amount is excludible from income under the qualified
principal residence indebtedness exclusion, the insolvency exclusion, or any
other exclusion that may apply. That discharged amount will generally be the
PRA Adjusted Forbearance Amount (which does not include the amounts
expected to be satisfied by PRA Investor Incentive Payments).
.05 To the extent that PRA Investor Incentive Payments are made on
behalf of a HAMP-PRA borrower who is described in section 4.07 of this revenue
procedure, the PRA Investor Incentive Payments are excluded from the gross
income of the HAMP-PRA borrower, and thus they are not fixed or determinable
income to the HAMP-PRA borrower. Under § 6041, these payments are not
subject to information reporting. See Notice 2011-14, 2011-11 I.R.B. 544, 546.

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.06 To the extent that PRA Investor Incentive Payments are made on
behalf of a HAMP-PRA borrower who is described in section 4.08 of this revenue
procedure, the PRA Investor Incentive Payments are includible in gross income
as fixed or determinable income in the taxable year required by the HAMP-PRA
borrower’s method of accounting. The payment is subject to the information
reporting requirements of § 6041, as described in section 3.15 of this revenue
procedure. Accordingly, the HAMP program administrator is required to issue a
Form 1099-MISC reporting the PRA Investor Incentive Payment.
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 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

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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

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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 includes 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

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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 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,

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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 indebtedness in gross income (that is, if the HAMP-PRA borrower
excluded all of it), the HAMP-PRA borrower may file a new Form 982 that
the Service will treat as superseding the earlier Form 982. The new
Form 982 will reflect the revised reduction in basis or in tax attributes
(under § 108(h)(1) or § 108(b)). The new Form 982 should be the

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Form 982 for the year of the permanent modification and should be filed
with the return for the taxable year in which the HAMP-PRA borrower’s
mortgage loan ceased to be in good standing.
.04 HAMP-PRA borrowers who choose to treat the HAMP-PRA discharge
as being realized on the dates on which the unpaid principal balance of the
mortgage loan is reduced.
(1) If a HAMP-PRA borrower chooses to realize the HAMP-PRA discharge
at the times that the unpaid principal balance on the new mortgage loan is
reduced, instead of at the time of the permanent modification, then the HAMP-
PRA borrower’s federal income tax returns for the taxable year that contains the
permanent modification and for the subsequent taxable years must not treat any
of the discharge as being realized at the time of the permanent modification and
must treat the entire HAMP-PRA discharge as being realized in the amounts—
and at the times—of the reductions in the unpaid principal balance. Except as
described in the last sentence of this paragraph, therefore, the income tax return
for the year of the permanent modification must include no gross income from—
nor report on Form 982 an exclusion of—any amount of the HAMP-PRA
discharge. Instead, the HAMP-PRA discharge is included in gross income (or is
reported on Form 982 as excluded from gross income) in the subsequent years
in which the unpaid principal balance is reduced. If the first such reduction
occurs in the year of the permanent modification, however, then the amount of
any such reduction is reflected as an inclusion or exclusion on the federal income
tax return for that year.

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(2) A HAMP-PRA borrower who has been using the method described in
section 6.02(1) of this revenue procedure may change to the method described
in section 6.02(2) but must comply with the consistency and open-year
requirements described in section 6.01 of this revenue procedure.
SECTION 7. PENALTY RELIEF FOR 2012
.01 The Service will not assert penalties under § 6721 or § 6722 against
an investor for failing to timely file and furnish a 2012 Form 1099-C as required
by section 5.03 through 5.04 and section 8.02 of this revenue procedure with
respect to discharge of indebtedness resulting from HAMP-PRA permanent
modifications that take place during calendar year 2012 if the following
requirements are satisfied:
(1) Not later than February 28, 2013, a statement is sent to the HAMP-
PRA borrower containing the following:
(a) The HAMP-PRA borrower’s name, address, and taxpayer
identification number; and
(b) The date and amount of the discharge of indebtedness (as
described in sections 4.01 through 4.04 of this revenue procedure) that is
required to be reported for 2012.
(2) Not later than March 28, 2013, a statement is sent to the Service. It
must be in the form of a single statement that separately lists for each HAMP-
PRA borrower the information specified in section 7.01(1) of this revenue
procedure. The statement should be sent to the Service at the following address:

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Internal Revenue Service Center
Stop 6728AUSC
Austin, TX 73301

.02 The Service will not assert penalties under § 6721 or § 6722 with
respect to any Forms 1099-MISC for 2012 that sections 5.06 and 8.02 of this
revenue procedure require to be filed with the Service and furnished to
taxpayers.
.03 Section 8.03 and 8.04 of this revenue procedure, below, describes
penalty relief regarding Forms 1099-C and 1099-MISC for 2010 and 2011.
SECTION 8. SCOPE AND EFFECTIVE DATE
.01 This revenue procedure applies to all borrowers, investors, and
servicers who participate, or have participated, in the HAMP-PRA, regardless of
when the permanent modification occurs.
.02 Section 5 of this revenue procedure is effective for Forms 1099-C and
1099-MISC due or filed after January 24, 2013.
.03 Because of the effective date in section 8.02 of this revenue
procedure, an investor is not subject to penalties under § 6721 or § 6722 on the
grounds that the investor failed to timely file and furnish a 2010 or 2011
Form 1099-C as described in section 5.03 through 5.04 of this revenue
procedure (or on the grounds that the investor filed or furnished a 2010 or 2011
Form 1099-C that is inconsistent with section 5.03 through 5.04 of this revenue
procedure), provided that the investor demonstrates a good faith attempt to
comply with the requirements of § 6050P and that the failure was not due to
willful neglect.

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.04 Because of the effective date in section 8.02 of this revenue
procedure, the Service will not assert penalties under § 6721 or § 6722 on the
grounds of a failure to timely file and furnish a 2010 or 2011 Form 1099-MISC, as
described in section 5.06 of this revenue procedure.
SECTION 9. DRAFTING INFORMATION
The principal authors of this revenue procedure are Ronald J. Goldstein of
the Office of Chief Counsel (Procedure and Administration); Shareen S. Pflanz
and Sheldon A. Iskow of the Office of Chief Counsel (Income Tax and
Accounting); and Andrea M. Hoffenson of the Office of Chief Counsel (Financial
Institutions and Products). For further information regarding this revenue
procedure contact Procedure and Administration branch 1 at (202) 622-4910,
Income Tax and Accounting branch 4 at (202) 622-4920, or Financial Institutions
and Products branch 1 at (202) 622-3920 (not toll free calls).