Letter to IRS on Notice 2021-28

Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2021-28) Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Dear Sir or Madam:

On behalf of its members, the American Bankers Association (ABA)1 is pleased to submit the following recommendations for items that should be included on the 2021-2022 Priority Guidance Plan. We applaud the efforts of the Internal Revenue Service and Treasury in issuing significant guidance related to pandemic challenges and legislation, especially as they related to the Paycheck Protection Program, which was an issue we specifically requested addressing in 2020.

Continuation of Issues Currently on Guidance Plan

The following issues are included on the current Priority Guidance Plan. As noted above, we applaud your focus on getting out much needed pandemic related guidance. Given the number of potentially affected taxpayers and administrative challenges, we also appreciate your attention to these issues and to the need for uniform guidance. Accordingly, we recommend that IRS and Treasury keep these issues on the Plan due to their importance to the banking industry, and in the case of interbank offered rates, financial markets overall, and we hope that guidance will be forthcoming shortly.

Finalization of Guidance under Section 1001 on the elimination of interbank offered rates

• Proposed regulations were issued on October 9, 2019 relating to, among other things, criteria in assessing whether contractual modifications made as a result of the cessation of LIBOR-based indices result in a taxable event. After the issuance, we understand a variety of taxpayers have submitted formal comments on the proposed regulations. In addition, there have been ongoing discussions between representatives from industry and Treasury. We appreciate and applaud the continued engagement of Treasury on these issues.
• While we appreciate the continuing engagement, our members are increasingly concerned that final regulations may include requirements for the substantiation of fair market values and other measures that will require material process and system changes. We urge Treasury to consider simplified mechanics to qualify for exceptions to Section 1001 treatment (recognition of gain or loss due to a modification) and other issues that have been identified in previous recommendations from industry. In light of the potential significant changes that may be required, it is very important that this guidance be completed as soon as possible.

Resolution of the appropriate treatment and reporting of accrued, but unpaid interest on modified mortgages

• There is ambiguity and a lack of guidance regarding the information reporting requirements in cases where accrued, but unpaid mortgage interest is included in a modified mortgage loan. In addition, there has been a significant number of mortgage forbearances and modifications of loans due to the economic issues caused by the pandemic. We believe that the IRS and Treasury are uniquely situated to address the issues in a way that is consistent with the law and the best interests of tax administration, including both the best interests of taxpayers and the IRS through proper tax compliance. To address this lack of guidance, ABA recommends that the guidance ultimately should, at a minimum:
  • Provide that payments are attributable first to interest that has accrued under the terms of a modified mortgage, second to interest on the pre-modification mortgage that was added to principal at the time of modification, and finally to principal that is not attributable to pre-modification interest.
  • Require reporting entities to allocate payments received on a modified mortgage to interest as described above.
  • Apply prospectively – that is, become effective for mortgages modified after issuance of final regulations.
  • Allow, to the extent a borrower on a mortgage that was modified prior to the effective date and did not deduct the post-modification payments of pre-modification interest that he or she would otherwise be entitled to deduct under the requested guidance, the borrower to deduct such amount in her/his next filed return via a simplified change in method of accounting process.
  • Provide that reporting entities that have acted in good faith with reporting in the absence of guidance will not be penalized.

Guidance under Section 166 on the conclusive presumption of worthlessness for bad debts

• In connection with addressing a variety of issues related to the timing of deducting bad debts and the current rules related to the book / tax conformity election, Treasury initiated a project to review and potentially update the regulations in this area. Notice 2013-35, which requested comments on the existing rules, was published on June 10, 2013:
  • Although there appears to be less controversy on this issue than in the past, this continues to be an important issue for banks. An examination directive (LB&I-04-1014-008) regarding these issues applied only for taxable years 2010-2014 and accordingly, updated guidance is necessary. In addition, concern remains that there may ultimately be an increase in the level of bad debts due to the economic fallout from the pandemic.
  • Accounting Standards Update 2016-13, (popularly known as “CECL”) has been promulgated for loan loss reserves. With the implementation of the standard required for public companies in 2020, it is a relevant time to review the book and tax issues surrounding bad debts.
  • We ask that Treasury re-open this project and update the regulations as appropriate.
  • For additional background, please see our joint trade letter submitted in 2013.

Consistent Basis Reporting Between an Estate and the Person Acquiring Property from a Decedent

• ABA urges the IRS to issue final rules on consistent basis reporting of an estate’s assets, in keeping with our June 1, 2016 comments. In particular, the final rule should:
  • Eliminate unnecessary filings of Form 8971,
  • Except certain property from the reporting requirements,
  • Withdraw the negative treatment of after-discovered or omitted property, and
  • Withdraw the reporting requirement for subsequent transfers of reported property.

We appreciate the efforts of the IRS and the Department of the Treasury to address these important issues. Please do not hesitate to contact us with any questions. For questions regarding the tax matters raised in this letter related to gifts and estate and trusts, please reach out to Phoebe Papageorgiou at (202) 663-5053.

Sincerely,

John P. Kinsella