rp-17-24.pdf

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26 CFR. 1.61-12; Income from discharge of indebtedness.
(Also Part III, §§ 61; 1.6050P-1.)

Rev. Proc. 2017-24

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.
SECTION 2. BACKGROUND
.01 In general.
Revenue Procedure 2015-57 addresses taxpayers who took out Federal student

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loans to finance attendance at a school owned by Corinthian Colleges, Inc. and whose
Federal student loans are discharged under the Department of Education’s “Defense to
Repayment” or “Closed School” discharge process. The IRS determined that it will not
assert that these taxpayers must recognize gross income as a result of these discharge
processes.
The Treasury Department and the IRS are aware that the Department of
Education (ED) has begun a process for settling and discharging Federal student loans
taken out by taxpayers to finance attendance at a school owned by ACI. ED has
estimated that to date about 4,400 ACI borrowers may be eligible for discharges under
this program and that number may increase.
In general, under the Higher Education Act of 1965 (HEA), Pub. L. 89-329, the
Closed School discharge process allows ED to discharge a Federal student loan
obtained by a student, or by a parent on behalf of a student, who was attending a
school at the time it closed or who withdrew from the school within a certain period prior
to the closing date. See generally 20 U.S.C. § 1087(c) (Federal Family Education Loan
(FFEL)); 20 U.S.C. § 1087dd(g) (Federal Perkins Loan); and 20 U.S.C. §
1087e(a)(1) (Federal Direct Loan).
Under the HEA, the Defense to Repayment process requires ED to discharge a
Federal Direct Loan if a student loan borrower establishes, as a defense against
repayment, that a school’s actions would give rise to a cause of action against the
school under applicable state law. See generally 20 U.S.C. § 1087e(h) and 34 C.F.R.
§ 685.206(c). FFEL loans may also be discharged under this process if certain
additional requirements are met. See 34 C.F.R. § 682.209(g).

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Section 61(a)(12) of the Internal Revenue Code (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.
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

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income to the extent of the debt reduction. This rule requires a case-by-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.
SECTION 3. SCOPE
The treatment provided in section 4 of this revenue procedure applies to any
taxpayer who took out Federal student loans to finance attendance at a school owned
by ACI that are discharged under the Closed School discharge process or the Defense
to Repayment discharge process and any applicable entity, as defined in section 6050P
and the regulations under that section, discharging these loans.
SECTION 4. APPLICATION
.01 Discharge of indebtedness income. The IRS will not assert that a taxpayer

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within the scope of this revenue procedure must recognize gross income as a result of
the Defense to Repayment discharge process for discharged Federal student loans that
were taken out to finance attendance at a school owned by ACI. See section 2.02 of
this revenue procedure for a general discussion regarding the exclusion from gross
income for borrowers participating in the Closed School discharge process.
.02 Recapture of tax credits and tax benefit rule. 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 of
the Code 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.
.03 Information reporting. The IRS will not assert that any creditor that is an
applicable entity, as defined in section 6050P of the Code, must file information returns
and furnish payee statements under that section for the discharge of any indebtedness
within the scope of this revenue procedure.
Further, this revenue procedure modifies Rev. Proc. 2015-57 to provide that the
IRS will not assert that any creditor under that revenue procedure that is an applicable
entity, as defined in section 6050P of the Code, must file information returns and furnish

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payee statements for the discharge of any indebtedness under that revenue procedure.
SECTION 5. EFFECT ON OTHER DOCUMENTS
Revenue Procedure 2015-57 is modified.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective for taxable years beginning on or after
January 1, 2016, for Federal student loans discharged under ED’s Defense to
Repayment discharge process or the Closed School discharge process.
SECTION 7. DRAFTING INFORMATION
The principal author of this revenue procedure is Craig Wojay of the Office of
Associate Chief Counsel (Income Tax & Accounting). For further information regarding
discharge of indebtedness income and exclusions, contact Mr. Wojay at (202) 317-4718
(not a toll-free call), and for further information regarding information reporting, contact
Elie Mishory at (202) 317-6844.