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2012. 2012.taxhow taxhow Internal Revenue Bulletin:  2013-7  February 11, 2013  Rev. 2012.taxhow Proc. 2012.taxhow 2013-16 Table of Contents SECTION 1. 2012.taxhow PURPOSE SECTION 2. 2012.taxhow BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE SECTION 3. 2012.taxhow BACKGROUND—APPLICABLE PROVISIONS OF LAW SECTION 4. 2012.taxhow FEDERAL INCOME TAX TREATMENT SECTION 5. 2012.taxhow INFORMATION-REPORTING OBLIGATIONS SECTION 6. 2012.taxhow HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA SECTION 7. 2012.taxhow PENALTY RELIEF FOR 2012 SECTION 8. 2012.taxhow SCOPE AND EFFECTIVE DATE SECTION 9. 2012.taxhow DRAFTING INFORMATION SECTION 1. 2012.taxhow 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®). 2012.taxhow 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 AlternativeSM (PRA). 2012.taxhow In appropriate cases, HAMP has been offering the PRA as part of a HAMP loan modification since the last quarter of 2010. 2012.taxhow Current plans call for HAMP to continue accepting new borrowers through the end of 2013. 2012.taxhow 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. 2012.taxhow SECTION 2. 2012.taxhow BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE . 2012.taxhow 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). 2012.taxhow A description of the program can be found at www. 2012.taxhow makinghomeaffordable. 2012.taxhow gov. 2012.taxhow . 2012.taxhow 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. 2012.taxhow 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. 2012.taxhow . 2012.taxhow 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. 2012.taxhow 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. 2012.taxhow However, as noted in section 2. 2012.taxhow 06 of this revenue procedure, a HAMP-PRA borrower sometimes may not have to pay all or a portion of the forbearance amount. 2012.taxhow (The forbearance amount associated with a HAMP-PRA principal reduction is called the “PRA Forbearance Amount. 2012.taxhow ”) . 2012.taxhow 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. 2012.taxhow . 2012.taxhow 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. 2012.taxhow 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. 2012.taxhow (It is the first day of either the first or the second month after the servicer transmits the trial period notice to the borrower. 2012.taxhow ) 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”). 2012.taxhow 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. 2012.taxhow Until the effective date of a permanent modification, the terms of the existing mortgage loan continue to apply. 2012.taxhow . 2012.taxhow 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. 2012.taxhow (The servicer allocates the entire reduction to the remaining PRA Forbearance Amount. 2012.taxhow ) 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. 2012.taxhow . 2012.taxhow 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). 2012.taxhow If a HAMP loan modification includes a PRA principal reduction, the HAMP program administrator makes additional incentive payments to the investor. 2012.taxhow These additional incentives are called “PRA Investor Incentive Payments” and are generally spread over three years. 2012.taxhow 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. 2012.taxhow The PRA Investor Incentive Payments range from 18 to 63 percent of the principal amounts reduced. 2012.taxhow For purposes of this revenue procedure, the excess of the initial PRA Forbearance Amount of a 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. 2012.taxhow ” . 2012.taxhow 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). 2012.taxhow . 2012.taxhow 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. 2012.taxhow 06 of this revenue procedure), the remaining PRA Investor Incentive Payments from the HAMP program administrator are also accelerated. 2012.taxhow . 2012.taxhow 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. 2012.taxhow SECTION 3. 2012.taxhow BACKGROUND—APPLICABLE PROVISIONS OF LAW . 2012.taxhow 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. 2012.taxhow See § 61(a)(12). 2012.taxhow . 2012.taxhow 02 Under § 1. 2012.taxhow 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. 2012.taxhow 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. 2012.taxhow However, if the change is conditioned on reasonable closing conditions, a modification occurs on the closing date of the agreement. 2012.taxhow See § 1. 2012.taxhow 1001-3(c)(6). 2012.taxhow . 2012.taxhow 03 Under § 108(e)(10), in the case of a debt-for-debt exchange (including a deemed exchange under § 1. 2012.taxhow 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. 2012.taxhow If the amount of debt satisfied in this manner exceeds that issue price, the borrower realizes discharge of indebtedness income on the exchange. 2012.taxhow See also § 1. 2012.taxhow 61-12(c). 2012.taxhow . 2012.taxhow 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. 2012.taxhow 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. 2012.taxhow See, e. 2012.taxhow g. 2012.taxhow , §§ 1. 2012.taxhow 1272-1(c)(5) and 1. 2012.taxhow 1274-2(d). 2012.taxhow . 2012.taxhow 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 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. 2012.taxhow Section 108(a)(1)(E) and 108(a)(1)(B). 2012.taxhow (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. 2012.taxhow ) . 2012.taxhow 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. 2012.taxhow . 2012.taxhow 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. 2012.taxhow See §§ 108(h) and 163(h)(3)(B)(i). 2012.taxhow . 2012.taxhow 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). 2012.taxhow 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. 2012.taxhow . 2012.taxhow 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. 2012.taxhow . 2012.taxhow 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. 2012.taxhow 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. 2012.taxhow . 2012.taxhow 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. 2012.taxhow See § 108(h)(1). 2012.taxhow 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). 2012.taxhow See § 108(b). 2012.taxhow 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). 2012.taxhow . 2012.taxhow 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 Indebtedness (and Section 1082 Basis Adjustment). 2012.taxhow See Form 982 instructions and Publication 4681. 2012.taxhow 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. 2012.taxhow . 2012.taxhow 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. 2012.taxhow See Notice 2003-18, 2003-1 C. 2012.taxhow B. 2012.taxhow 699, and Rev. 2012.taxhow Rul. 2012.taxhow 79-356, 1979-2 C. 2012.taxhow B. 2012.taxhow 28. 2012.taxhow 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). 2012.taxhow See Rev. 2012.taxhow Rul. 2012.taxhow 2005-46, 2005-2 C. 2012.taxhow B. 2012.taxhow 120, and Rev. 2012.taxhow Rul. 2012.taxhow 75-246, 1975-1 C. 2012.taxhow B. 2012.taxhow 24. 2012.taxhow . 2012.taxhow 14 Under § 451 and § 1. 2012.taxhow 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. 2012.taxhow . 2012.taxhow 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. 2012.taxhow See § 6041(a) and (d) and § 1. 2012.taxhow 6041-1(a)(1) and (b). 2012.taxhow . 2012.taxhow 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. 2012.taxhow See § 6050P(a)-(c) and §§ 1. 2012.taxhow 6050P-1(a) and 1. 2012.taxhow 6050P-2(a) and (d). 2012.taxhow . 2012.taxhow 17 Section 6721 imposes penalties with respect to information returns required to be filed with the Service. 2012.taxhow 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. 2012.taxhow Section 6724(d)(1) includes Forms 1099-MISC and 1099-C in the term “information return. 2012.taxhow ” . 2012.taxhow 18 Section 6722 imposes penalties with respect to payee statements required to be furnished to payees. 2012.taxhow 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. 2012.taxhow 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. 2012.taxhow SECTION 4. 2012.taxhow FEDERAL INCOME TAX TREATMENT . 2012.taxhow 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. 2012.taxhow See § 1. 2012.taxhow 1001-3. 2012.taxhow 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. 2012.taxhow See also § 61(a)(12) and § 1. 2012.taxhow 61-12(c). 2012.taxhow . 2012.taxhow 02 A HAMP-PRA borrower has the ability to avoid payment of the PRA Adjusted Forbearance Amount. 2012.taxhow 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. 2012.taxhow 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. 2012.taxhow . 2012.taxhow 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. 2012.taxhow 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. 2012.taxhow . 2012.taxhow 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. 2012.taxhow Therefore, for purposes of § 1. 2012.taxhow 1001-3, the date of the modification is the date of the permanent modification. 2012.taxhow . 2012.taxhow 05 Unless an exclusion applies, the HAMP-PRA borrower includes in gross income the discharge of indebtedness income described in section 4. 2012.taxhow 01 of this revenue procedure for the taxable year in which the permanent modification occurs. 2012.taxhow 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. 2012.taxhow 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. 2012.taxhow . 2012.taxhow 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. 2012.taxhow . 2012.taxhow 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. 2012.taxhow This is consistent with Rev. 2012.taxhow Rul. 2012.taxhow 2009-19, 2009-28 I. 2012.taxhow R. 2012.taxhow B. 2012.taxhow 111, which addressed the treatment of Pay-for-Performance Success Payments. 2012.taxhow . 2012.taxhow 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. 2012.taxhow If the HAMP-PRA borrower uses the cash receipts and disbursements method of 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. 2012.taxhow . 2012.taxhow 09 As described in section 2. 2012.taxhow 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. 2012.taxhow To the extent that the HAMP-PRA borrower is described in section 4. 2012.taxhow 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. 2012.taxhow To the extent that the HAMP-PRA borrower is described in section 4. 2012.taxhow 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. 2012.taxhow SECTION 5. 2012.taxhow INFORMATION-REPORTING OBLIGATIONS . 2012.taxhow 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. 2012.taxhow A copy of this form is required to be furnished to the borrower. 2012.taxhow . 2012.taxhow 02 As stated in sections 4. 2012.taxhow 01 and 4. 2012.taxhow 04 of this revenue procedure, the HAMP-PRA discharge of indebtedness is realized at the time of the permanent modification of the mortgage loan. 2012.taxhow . 2012.taxhow 03 An investor is an applicable entity that is required under § 1. 2012.taxhow 6050P-1 and this revenue procedure to issue a Form 1099-C for discharge of indebtedness. 2012.taxhow Under § 1. 2012.taxhow 6050P-1(b)(2)(F), the permanent modification of a mortgage loan is an identifiable event. 2012.taxhow Identifiable events determine when Forms 1099-C have to be issued. 2012.taxhow Thus, the Form 1099-C is issued for the calendar year in which the permanent mortgage loan modification occurs. 2012.taxhow This rule under § 1. 2012.taxhow 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. 2012.taxhow . 2012.taxhow 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. 2012.taxhow 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). 2012.taxhow . 2012.taxhow 05 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. 2012.taxhow 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. 2012.taxhow Under § 6041, these payments are not subject to information reporting. 2012.taxhow See Notice 2011-14, 2011-11 I. 2012.taxhow R. 2012.taxhow B. 2012.taxhow 544, 546. 2012.taxhow . 2012.taxhow 06 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. 2012.taxhow 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. 2012.taxhow The payment is subject to the information reporting requirements of § 6041, as described in section 3. 2012.taxhow 15 of this revenue procedure. 2012.taxhow Accordingly, the HAMP program administrator is required to issue a Form 1099-MISC reporting the PRA Investor Incentive Payment. 2012.taxhow SECTION 6. 2012.taxhow HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA . 2012.taxhow 01 In general. 2012.taxhow 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). 2012.taxhow As a result, some HAMP-PRA borrowers have been reporting the discharge of indebtedness under HAMP-PRA over the Three-year Period. 2012.taxhow 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. 2012.taxhow 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. 2012.taxhow 02 of this revenue procedure consistently to the taxable year of the permanent modification and to all subsequent taxable years. 2012.taxhow Thus, a HAMP-PRA borrower may not choose a borrower option under section 6. 2012.taxhow 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. 2012.taxhow . 2012.taxhow 02 HAMP-PRA borrower options. 2012.taxhow 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. 2012.taxhow 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. 2012.taxhow If some or all of the reduction in the unpaid principal balance is accelerated (as described in section 2. 2012.taxhow 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. 2012.taxhow . 2012.taxhow 03 HAMP-PRA borrowers who choose to realize the HAMP-PRA discharge at the time of the permanent modification. 2012.taxhow (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 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. 2012.taxhow (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. 2012.taxhow 02(2) of this revenue procedure, then the borrower may change to reporting the discharge of indebtedness using the method described in section 6. 2012.taxhow 02(1) of this revenue procedure by filing a 2012 Form 982 with the borrower’s timely filed (with extensions) 2012 income tax return. 2012.taxhow This section 6. 2012.taxhow 03(2) applies only if the change to reporting the discharge using the method described in section 6. 2012.taxhow 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. 2012.taxhow 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 permanent modification, minus any reductions due to the permanent modification that the borrower actually reported on Forms 982 for taxable years prior to 2012. 2012.taxhow (3) Example. 2012.taxhow The following example illustrates the application of section 6. 2012.taxhow 03(2) of this revenue procedure. 2012.taxhow In 2010, B’s basis in B’s principal residence was $330,000. 2012.taxhow In 2010, B’s mortgage loan on the principal residence is permanently modified under HAMP-PRA. 2012.taxhow 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). 2012.taxhow The trial period plan effective date also fell in 2010. 2012.taxhow 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. 2012.taxhow 02(2) of this revenue procedure. 2012.taxhow 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. 2012.taxhow 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. 2012.taxhow For 2012, B chooses to change to reporting the discharge of indebtedness using the method described in section 6. 2012.taxhow 02(1) of this revenue procedure. 2012.taxhow 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. 2012.taxhow 02(1) of this revenue procedure, minus the $10,000 basis reduction that B reported on B’s 2011 Form 982). 2012.taxhow (4) If a HAMP-PRA borrower reports the entire HAMP-PRA discharge using the method described in section 6. 2012.taxhow 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. 2012.taxhow 10 of this revenue procedure, then some or all of the anticipated reductions in the PRA Adjusted Forbearance Amount will not take place. 2012.taxhow Because the amount of these anticipated reductions was not included in determining the issue price of the new mortgage loan that, pursuant to § 1. 2012.taxhow 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. 2012.taxhow Under these circumstances, the discharge of indebtedness income determined as of the date of the permanent modification will have been overstated. 2012.taxhow (5) The Service will not challenge a HAMP-PRA borrower who is described in section 6. 2012.taxhow 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. 2012.taxhow 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. 2012.taxhow (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. 2012.taxhow The new Form 982 will reflect the revised reduction in basis or in tax attributes (under § 108(h)(1) or § 108(b)). 2012.taxhow The new Form 982 should be the 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. 2012.taxhow . 2012.taxhow 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. 2012.taxhow (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. 2012.taxhow 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. 2012.taxhow 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. 2012.taxhow 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. 2012.taxhow (2) A HAMP-PRA borrower who has been using the method described in section 6. 2012.taxhow 02(1) of this revenue procedure may change to the method described in section 6. 2012.taxhow 02(2) but must comply with the consistency and open-year requirements described in section 6. 2012.taxhow 01 of this revenue procedure. 2012.taxhow SECTION 7. 2012.taxhow PENALTY RELIEF FOR 2012 . 2012.taxhow 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. 2012.taxhow 03 through 5. 2012.taxhow 04 and section 8. 2012.taxhow 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. 2012.taxhow 01 through 4. 2012.taxhow 04 of this revenue procedure) that is required to be reported for 2012. 2012.taxhow (2) Not later than March 28, 2013, a statement is sent to the Service. 2012.taxhow It must be in the form of a single statement that separately lists for each HAMP-PRA borrower the information specified in section 7. 2012.taxhow 01(1) of this revenue procedure. 2012.taxhow The statement should be sent to the Service at the following address: Internal Revenue Service Center Stop 6728AUSC Austin, TX 73301 . 2012.taxhow 02 The Service will not assert penalties under § 6721 or § 6722 with respect to any Forms 1099-MISC for 2012 that sections 5. 2012.taxhow 06 and 8. 2012.taxhow 02 of this revenue procedure require to be filed with the Service and furnished to taxpayers. 2012.taxhow . 2012.taxhow 03 Section 8. 2012.taxhow 03 and 8. 2012.taxhow 04 of this revenue procedure, below, describes penalty relief regarding Forms 1099-C and 1099-MISC for 2010 and 2011. 2012.taxhow SECTION 8. 2012.taxhow SCOPE AND EFFECTIVE DATE . 2012.taxhow 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. 2012.taxhow . 2012.taxhow 02 Section 5 of this revenue procedure is effective for Forms 1099-C and 1099-MISC due or filed after January 24, 2013. 2012.taxhow . 2012.taxhow 03 Because of the effective date in section 8. 2012.taxhow 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. 2012.taxhow 03 through 5. 2012.taxhow 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. 2012.taxhow 03 through 5. 2012.taxhow 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. 2012.taxhow . 2012.taxhow 04 Because of the effective date in section 8. 2012.taxhow 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. 2012.taxhow 06 of this revenue procedure. 2012.taxhow SECTION 9. 2012.taxhow DRAFTING INFORMATION The principal authors of this revenue procedure are Ronald J. 2012.taxhow Goldstein of the Office of Chief Counsel (Procedure and Administration); Shareen S. 2012.taxhow Pflanz and Sheldon A. 2012.taxhow Iskow of the Office of Chief Counsel (Income Tax and Accounting); and Andrea M. 2012.taxhow Hoffenson of the Office of Chief Counsel (Financial Institutions and Products). 2012.taxhow 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). 2012.taxhow Prev  Up  Next   Home   More Internal Revenue Bulletins
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File a Delayed Baggage Report

If your bags aren't on the conveyor belt when you arrive, file a report with the airline before you leave the airport.

  • Insist they fill out a form and give you a copy, even if they say the bag will be on the next flight.
  • Get the name of the person who filled out the form and a phone number for follow up.
  • Confirm that the airline will deliver the bag to you without charge when it's found.

Some airlines will give you money to purchase a few necessities. If they don't provide you with cash, ask what types of articles would be reimbursable, and keep all receipts.

If a suitcase arrives damaged, the airline will usually pay for repairs. If an item can't be fixed, they will negotiate to pay you its depreciated value. The same is true for belongings packed inside. Of course, airlines may refuse to pay for damage if it was caused by your failure to pack something properly rather than the airline's handling.

Submit a Second Detailed Report

If your bag is declared officially lost, you will have to submit a second, more detailed form within a time period set by the airline. The information on the form is used to estimate the value of your lost belongings. Airlines can limit their liability for delayed, lost and damaged baggage, however, they must prominently display a sign that explains the limit. According to the Office of Aviation Consumer Protection and Enforcement; the maximum an airline pays on lost bags and their contents is limited to $3,000 per passenger on domestic flights, and $1,500 per passenger for checked baggage on international flights. The Travel Insider offers more information on maximum liability, including special rates that change on a daily basis.

If the airline's offer doesn't fully cover your loss, check your homeowner's or renter's insurance to see if it covers losses away from home. Some credit card companies and travel agencies also offer optional or even automatic supplemental baggage coverage.

On those trips when you know you're carrying more than the liability limits, you may want to ask about purchasing "excess valuation" from the airline when you check in. Of course, there is no guarantee the airline will sell you this protection. The airline may refuse, especially if the item is valuable or breakable.

Airline Fees

Air travelers may choose from a wide variety of airfares. Compare rates online using airline websites or third-party reservation services. You can also contact a travel agent, another ticket outlet, or the airlines serving the places to which you want to travel. Watch for newspaper, magazine, and radio ads. Be wary of new companies serving the market; they may offer lower fares but may not yet have a track record for safety or reliability.
Many airlines charge extra fees for checked baggage, advance seat assignments, meals, and other services. The Department of Transportation has ruled that an airline must prominently disclose all potential fees on their websites. The airline must also refund baggage fees if they lose your baggage. Airlines are also required to include all government taxes and fees in the advertised price. For more information contact the Department of Transportation's Aviation Consumer Protection Division.

The 2012.taxhow

2012. 2012.taxhow taxhow 2. 2012.taxhow   Possession Source Income Table of Contents Types of IncomeCompensation for Labor or Personal Services Investment Income Sales or Other Dispositions of Property Scholarships, Fellowships, Grants, Prizes, and Awards Effectively Connected Income In order to determine where to file your return and which form(s) you need to complete, you must determine the source of each item of income you received during the tax year. 2012.taxhow Income you received from sources within, or that was effectively connected with the conduct of a trade or business within, the relevant possession must be identified separately from U. 2012.taxhow S. 2012.taxhow or foreign source income. 2012.taxhow This chapter discusses the rules for determining if the source of your income is from: American Samoa, The Commonwealth of the Northern Mariana Islands (CNMI), The Commonwealth of Puerto Rico (Puerto Rico), Guam, or The U. 2012.taxhow S. 2012.taxhow Virgin Islands (USVI). 2012.taxhow Generally, the same rules that apply for determining U. 2012.taxhow S. 2012.taxhow source income also apply for determining possession source income. 2012.taxhow However, there are some important exceptions to these rules. 2012.taxhow Both the general rules and the exceptions are discussed in this chapter. 2012.taxhow U. 2012.taxhow S. 2012.taxhow income rule. 2012.taxhow   This rule states that income is not possession source income if, under the rules of Internal Revenue Code sections 861–865, it is treated as income: From sources within the United States, or Effectively connected with the conduct of a trade or business within the United States. 2012.taxhow Table 2-1 shows the general rules for determining whether income is from sources within the United States. 2012.taxhow Table 2-1. 2012.taxhow General Rules for Determining U. 2012.taxhow S. 2012.taxhow Source of Income Item of Income Factor Determining Source Salaries, wages, and other compensation for labor or personal services Where labor or services performed Pensions Contributions: Where services were performed that earned the pension Investment earnings: Where pension trust is located Interest Residence of payer Dividends Where corporation created or organized Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. 2012.taxhow Where property is used Sale of business inventory—purchased Where sold Sale of business inventory—produced Allocation if produced and sold in different locations Sale of real property Location of property Sale of personal property Seller's tax home (but see Special Rules for Gains From Dispositions of Certain Property , later, for exceptions) Sale of natural resources Allocation based on fair market value of product at export terminal. 2012.taxhow For more information, see Regulations section 1. 2012.taxhow 863-1(b). 2012.taxhow Types of Income This section looks at the most common types of income received by individuals, and the rules for determining the source of the income. 2012.taxhow Generally, the same rules shown in Table 2-1 are used to determine if you have possession source income. 2012.taxhow Compensation for Labor or Personal Services Income from labor or personal services includes wages, salaries, commissions, fees, per diem allowances, employee allowances and bonuses, and fringe benefits. 2012.taxhow It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business. 2012.taxhow Services performed wholly within a relevant possession. 2012.taxhow   Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. 2012.taxhow However, there is an exception for income earned as a member of the U. 2012.taxhow S. 2012.taxhow Armed Forces or a civilian spouse. 2012.taxhow U. 2012.taxhow S. 2012.taxhow Armed Forces. 2012.taxhow   If you are a bona fide resident of a relevant possession, your military service pay will be sourced in that possession even if you perform the services in the United States or another possession. 2012.taxhow However, if you are not a bona fide resident of a possession, your military service pay will be income from the  United States even if you perform services in a possession. 2012.taxhow Civilian spouse of active duty member of the U. 2012.taxhow S. 2012.taxhow Armed Forces. 2012.taxhow   If you are a bona fide resident of a U. 2012.taxhow S. 2012.taxhow possession and choose to keep that possession as your tax residence under MSRRA when relocating with your servicemember spouse under military orders, the source of income for your labor or personal services is considered to be that possession. 2012.taxhow Likewise, if your tax residence is in one of the 50 states or the District of Columbia before relocating and you choose to keep it as your tax residence, the source of income for services performed in any of the U. 2012.taxhow S. 2012.taxhow possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia. 2012.taxhow Services performed partly inside and partly outside a relevant possession. 2012.taxhow   If you are an employee and receive compensation for labor or personal services performed both inside and outside the relevant possession, special rules apply in determining the source of the compensation. 2012.taxhow Compensation (other than certain fringe benefits) is sourced on a time basis. 2012.taxhow Certain fringe benefits (such as housing and education) are sourced on a geographical basis. 2012.taxhow   Or, you may be permitted to use an alternative basis to determine the source of compensation. 2012.taxhow See Alternative basis , later. 2012.taxhow   If you are self-employed, determine the source of your income for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. 2012.taxhow In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. 2012.taxhow Time basis. 2012.taxhow   Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). 2012.taxhow Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed  services in the relevant  possession during the year     Total number of days you  performed services during the year           You can use a unit of time less than a day in the above fraction, if appropriate. 2012.taxhow The time period for which the income is made does not have to be a year. 2012.taxhow Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. 2012.taxhow Example. 2012.taxhow In 2013, you worked in your employer's office in the United States for 60 days and in the Puerto Rico office for 180 days, earning a total of $80,000 for the year. 2012.taxhow Your Puerto Rico source income is $60,000, figured as follows. 2012.taxhow       180 days 240 days × $80,000 = $60,000                 Multi-year compensation. 2012.taxhow   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. 2012.taxhow Multi-year compensation is compensation that is included in your income in 1 tax year but is attributable to a period that includes 2 or more tax years. 2012.taxhow You determine the period to which the income is attributable based on the facts and circumstances of your case. 2012.taxhow For more information on multi-year compensation, see Treasury Decision (T. 2012.taxhow D. 2012.taxhow ) 9212 and Regulations section 1. 2012.taxhow 861-4, 2005-35 I. 2012.taxhow R. 2012.taxhow B. 2012.taxhow 429, available at www. 2012.taxhow irs. 2012.taxhow gov/irb/2005-35_IRB/ar14. 2012.taxhow html. 2012.taxhow Certain fringe benefits sourced on a geographical basis. 2012.taxhow   If you received any of the following fringe benefits as compensation for labor or services performed as an employee partly inside and partly outside a relevant possession, you must source that income on a geographical basis. 2012.taxhow Housing. 2012.taxhow Education. 2012.taxhow Local transportation. 2012.taxhow Tax reimbursement. 2012.taxhow Hazardous or hardship duty pay. 2012.taxhow Moving expense reimbursement. 2012.taxhow For information on determining the source of the fringe benefits listed above, see Regulations section 1. 2012.taxhow 861-4. 2012.taxhow Alternative basis. 2012.taxhow   You can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your income than the time or geographical basis. 2012.taxhow If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your income. 2012.taxhow De minimis exception. 2012.taxhow   There is an exception to the rule for determining the source of income earned in a possession. 2012.taxhow Generally, you will not have income from a possession if during a tax year you: Are a U. 2012.taxhow S. 2012.taxhow citizen or resident, Are not a bona fide resident of that possession, Are not employed by or under contract with an individual, partnership, or corporation that is engaged in a trade or business in that possession, Temporarily perform services in that possession for 90 days or less, and Earned $3,000 or less from such services. 2012.taxhow This exception began with income earned during your 2008 tax year. 2012.taxhow Pensions. 2012.taxhow   Generally, pension income has two components: contributions to the pension plan and the earnings accrued from investing those contributions. 2012.taxhow The contribution portion is sourced according to where services were performed that earned the pension. 2012.taxhow The investment earnings portion is sourced according to the location of the pension trust. 2012.taxhow Example. 2012.taxhow You are a U. 2012.taxhow S. 2012.taxhow citizen who worked in Puerto Rico for a U. 2012.taxhow S. 2012.taxhow company. 2012.taxhow All services were performed in Puerto Rico. 2012.taxhow Upon retirement you remained in Puerto Rico and began receiving your pension from the U. 2012.taxhow S. 2012.taxhow pension trust of your employer. 2012.taxhow Distributions from the U. 2012.taxhow S. 2012.taxhow pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U. 2012.taxhow S. 2012.taxhow source income. 2012.taxhow Investment Income This category includes such income as interest, dividends, rents, and royalties. 2012.taxhow Interest income. 2012.taxhow   The source of interest income is generally determined by the residence of the payer. 2012.taxhow Interest paid by corporations created or organized in a relevant possession (possession corporation) or by individuals who are bona fide residents of a relevant possession is considered income from sources within that possession. 2012.taxhow   However, there is an exception to this rule if you are a bona fide resident of a relevant possession, receive interest from a corporation created or organized in that possession, and are a shareholder of that corporation who owns, directly or indirectly, at least 10% of the total voting stock of the corporation. 2012.taxhow See Regulations section 1. 2012.taxhow 937-2(i) for more information. 2012.taxhow Dividends. 2012.taxhow   Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. 2012.taxhow There are additional rules for bona fide residents of a relevant possession who receive dividend income from possession corporations, and who own, directly or indirectly, at least 10% of the voting stock of the corporation. 2012.taxhow For more information, see Regulations section 1. 2012.taxhow 937-2(g). 2012.taxhow Rental income. 2012.taxhow   Rents from property located in a relevant possession are treated as income from sources within that possession. 2012.taxhow Royalties. 2012.taxhow   Royalties from natural resources located in a relevant possession are considered income from sources within that possession. 2012.taxhow   Also considered possession source income are royalties received for the use of, or for the privilege of using, in a relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. 2012.taxhow Sales or Other Dispositions of Property The source rules for sales or other dispositions of property are varied. 2012.taxhow The most common situations are discussed below. 2012.taxhow Real property. 2012.taxhow   Real property includes land and buildings, and generally anything built on, growing on, or attached to land. 2012.taxhow The location of the property generally determines the source of income from the sale. 2012.taxhow For example, if you are a bona fide resident of Guam and sell your home that is located in Guam, the gain on the sale is sourced in Guam. 2012.taxhow If, however, the home you sold was located in the United States, the gain is U. 2012.taxhow S. 2012.taxhow source income. 2012.taxhow Personal property. 2012.taxhow   The term “personal property” refers to property (such as machinery, equipment, or furniture) that is not real property. 2012.taxhow Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. 2012.taxhow If personal property is sold by a bona fide resident of a relevant possession, the gain (or loss) from the sale is treated as sourced within that possession. 2012.taxhow   This rule does not apply to the sale of inventory, intangible property, depreciable personal property, or property sold through a foreign office or fixed place of business. 2012.taxhow The rules applying to sales of inventory are discussed below. 2012.taxhow For information on sales of the other types of property mentioned, see Internal Revenue Code section 865. 2012.taxhow Inventory. 2012.taxhow   Your inventory is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. 2012.taxhow The source of income from the sale of inventory depends on whether the inventory was purchased or produced. 2012.taxhow Purchased. 2012.taxhow   Income from the sale of inventory that you purchased is sourced where you sell the property. 2012.taxhow Generally, this is where title to the property passes to the buyer. 2012.taxhow Produced. 2012.taxhow   Income from the sale of inventory that you produced in a relevant possession and sold outside that possession (or vice versa) is sourced based on an allocation. 2012.taxhow For information on making the allocation, see Regulations section 1. 2012.taxhow 863-3(f). 2012.taxhow Special Rules for Gains From Dispositions of Certain Property There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U. 2012.taxhow S. 2012.taxhow citizen or resident alien prior to becoming a bona fide resident of a possession. 2012.taxhow You are subject to these special rules if you meet both of the following conditions. 2012.taxhow For the tax year for which the source of the gain must be determined, you are a bona fide resident of the relevant possession. 2012.taxhow For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of the relevant possession). 2012.taxhow If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. 2012.taxhow Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U. 2012.taxhow S. 2012.taxhow tax return. 2012.taxhow (See chapter 3 for additional filing information. 2012.taxhow ) With respect to the CNMI, Guam, and the USVI, the gain from the disposition of this property will not meet the requirements for certain tax rules that may allow bona fide residents of those possessions to reduce or obtain a rebate of taxes on income from sources within the relevant possessions. 2012.taxhow These rules apply to dispositions after April 11, 2005. 2012.taxhow For details, see Regulations section 1. 2012.taxhow 937-2(f)(1) and Examples 1 and 2 of section 1. 2012.taxhow 937-2(k). 2012.taxhow Example 1. 2012.taxhow In 2007, Cheryl Jones, a U. 2012.taxhow S. 2012.taxhow citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U. 2012.taxhow S. 2012.taxhow corporation listed on the New York Stock Exchange. 2012.taxhow On March 1, 2010, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. 2012.taxhow Cheryl satisfied the presence test in 2010 and, under the year-of-move exception, she was considered a bona fide resident of Puerto Rico for the rest of 2010. 2012.taxhow On March 1, 2010, the closing value of Cheryl's stock in the Rose Corporation was $2,000. 2012.taxhow On January 5, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. 2012.taxhow Under the earlier rules, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico. 2012.taxhow The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. 2012.taxhow This existing special rule applies if you are a U. 2012.taxhow S. 2012.taxhow citizen or resident alien who becomes a bona fide resident of American Samoa, the CNMI, or Guam, and who has gain from the disposition of certain U. 2012.taxhow S. 2012.taxhow assets during the 10-year period beginning when you became a bona fide resident. 2012.taxhow The gain is U. 2012.taxhow S. 2012.taxhow source income that generally is subject to U. 2012.taxhow S. 2012.taxhow tax if the property is either (1) located in the United States; (2) stock issued by a U. 2012.taxhow S. 2012.taxhow corporation or a debt obligation of a U. 2012.taxhow S. 2012.taxhow person or of the United States, a state (or political subdivision), or the District of Columbia; or (3) property that has a basis in whole or in part by reference to property described in (1) or (2). 2012.taxhow See chapter 3 for filing information. 2012.taxhow Special election. 2012.taxhow   For dispositions after April 11, 2005, you can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of the relevant possession (the possession holding period) as gain (or loss) from sources within that possession. 2012.taxhow Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. 2012.taxhow This election overrides both of the special rules discussed earlier. 2012.taxhow   There are two methods for figuring the gain for the possession holding period, one for marketable securities and another for other types of investment property. 2012.taxhow Marketable securities. 2012.taxhow   Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. 2012.taxhow Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U. 2012.taxhow S. 2012.taxhow holding periods. 2012.taxhow   Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. 2012.taxhow The gain (or loss) attributable to the possession holding period is the difference in fair market value of the security at the close of the market on the first and last days of this holding period. 2012.taxhow This is your gain (or loss) that is treated as being from sources within the relevant possession. 2012.taxhow If you were a bona fide resident of the relevant possession for more than one continuous period, combine the gains (or losses) from each possession holding period. 2012.taxhow Example 2. 2012.taxhow Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U. 2012.taxhow S. 2012.taxhow and possession holding periods. 2012.taxhow Cheryl's possession holding period began March 1, 2010, the date her tax home changed to Puerto Rico. 2012.taxhow Therefore, the portion of gain attributable to her possession holding period is $5,000 ($7,000 sale price – $2,000 closing value on first day of the possession holding period). 2012.taxhow By reporting $5,000 of her $6,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. 2012.taxhow Other personal property. 2012.taxhow   For personal property other than marketable securities, use a time-based allocation. 2012.taxhow Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction. 2012.taxhow      Number of days in the  possession holding period     Total number of days  in your holding period         The result is your gain (or loss) that is treated as being from sources within the relevant possession. 2012.taxhow Example 3. 2012.taxhow In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2009. 2012.taxhow On March 1, 2010, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. 2012.taxhow On September 16, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold her interest in Alder Partnership for a $100,000 gain. 2012.taxhow She had owned the interest for a total of 1,720 days. 2012.taxhow Cheryl's possession holding period (from March 1, 2010, through September 16, 2013) is 1,296 days. 2012.taxhow The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,296 Puerto Rico days ÷ 1,720 total days)). 2012.taxhow By reporting $75,349 of her $100,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. 2012.taxhow Scholarships, Fellowships, Grants, Prizes, and Awards The source of these types of income is generally the residence of the payer, regardless of who actually disburses the funds. 2012.taxhow Therefore, in order to be possession source income, the payer must be a resident of the relevant possession, such as an individual who is a bona fide resident or a corporation created or organized in that possession. 2012.taxhow These rules do not apply to amounts paid as salary or other compensation for services. 2012.taxhow See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply. 2012.taxhow Effectively Connected Income In limited circumstances, some kinds of income from sources outside the relevant possession must be treated as effectively connected with a trade or business in that possession. 2012.taxhow These circumstances are listed below. 2012.taxhow You have an office or other fixed place of business in the relevant possession to which the income can be attributed. 2012.taxhow That office or place of business is a material factor in producing the income. 2012.taxhow The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. 2012.taxhow An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. 2012.taxhow The three kinds of income from sources outside the relevant possession to which these rules apply are the following. 2012.taxhow Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the relevant possession or from any interest in such property. 2012.taxhow Included are rents or royalties for the use of, or for the privilege of using, outside the relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the relevant possession. 2012.taxhow Dividends or interest from the active conduct of a banking, financing, or similar business in the relevant possession. 2012.taxhow Income, gain, or loss from the sale or exchange outside the relevant possession, through the office or other fixed place of business in the relevant possession, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. 2012.taxhow Item (3) will not apply if you sold the property for use, consumption, or disposition outside the relevant possession and an office or other fixed place of business in a foreign country was a material factor in the sale. 2012.taxhow Example. 2012.taxhow Marcy Jackson is a bona fide resident of American Samoa. 2012.taxhow Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. 2012.taxhow A software purchaser will frequently pay Marcy an additional amount to install the software on the purchaser's operating system and to ensure that the software is functioning properly. 2012.taxhow Marcy installs the software at the purchaser's place of business, which may be in American Samoa, in the United States, or in another country. 2012.taxhow The income from selling the software is effectively connected with the conduct of Marcy's business in American Samoa, even though the product's destination may be outside the possession. 2012.taxhow However, the compensation she receives for installing the software (personal services) outside of American Samoa is not effectively connected with the conduct of her business in the possession—the income is sourced where she performs the services. 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