Waived pension overpayment was not additional taxable income

Plain-English summary

A retired employee received pension payments that were later found to include an overpayment caused by earlier calculation errors. The pension administrator reduced future payments but waived collection of the past overpayment under its automatic-waiver criteria and expected to issue Form 1099-C. The retiree had already divided every pension payment, including the overpaid amount, between taxable and tax-free portions under the applicable simplified method. The IRS therefore ruled that forgiveness of the repayment obligation did not create additional gross income under section 61. The retiree did not have to report the waived amount again even if Form 1099-C was issued.

Ruling snapshot

• Question: Did waiver of a previously taxed pension overpayment create discharge-of-indebtedness income?
• Outcome: Approved, the waived amount was not included in income again.
• Key authorities: IRC §§ 61(a)(11), 61(a)(12), 72(b); Notice 88-118

Full text (IRS public release)

Internal Revenue Service                                          Department of the Treasury
                                                                  Washington, DC 20224

Number: 201743011                                                 Third Party Communication: None
Release Date: 10/27/2017                                          Date of Communication: Not Applicable
Index Number: 61.22-00

                                                                  Person To Contact:
                                                                  --------------------------, ID No. ----------------
                                                                  -----------------
------------------------------------
                                                                  Telephone Number:
----------------------
                                                                  ----------------------
-------------------------------
                                                                  Refer Reply To:
                                                                  CC:ITA:B04
                                                                  PLR-105098-17
                                                                  Date:
                                                                  July 31, 2017



In Re: -----------------------------------------------------


Legend

Department                 =           ---------------------------------

Employer                   =           ---------------------------------------------------

Employee                   =           ------------------

Date 1                     =           -----------------

Date 2                     =           ----------------------

Date 3                     =           ---------------------

Date 4                     =           ------------------------

Pension Plan               =           ---------------------------------------------------------------------------------

x                          =           --------------


Dear ------------------:

This letter responds to your request for a private letter ruling that you do not include in
your income under § 61 of the Internal Revenue Code $x from discharge of
PLR-105098-17                                        2

indebtedness due to the Department’s waiver of collection of a $x overpayment of your
pension.

Facts

You worked for Employer from Date 1 until your retirement on Date 2. While you were
employed by Employer, you made after-tax contributions to the Pension Plan.1 Due to
your years of service as an Employee, you became eligible to receive payments from
the Pension Plan, which the Department administers.

You began receiving payments from the Pension Plan on Date 3. You included in your
gross income each year on your federal income tax return the taxable portion of the
pension payments you received during that year. In accordance with Notice 88-118,
1988-47 I.R.B. 9, and § 72(b), you used the simplified safe harbor method to determine
the tax-free and taxable portions of your pension payments from the Pension Plan.

On Date 4, you received a letter from the Department informing you that your pension
was going to be reduced in the future due to systematic errors made years ago. The
Department’s calculations showed that you received a total overpayment of $x due to
errors in the calculation of your benefit. The Department has the discretion to waive
past overpayments if certain criteria are satisfied. The Department determined you
satisfied the criteria for automatic waiver of the collection of the overpayment. You
represent that the Department would furnish you a Form 1099-C, Cancellation of Debt,
for ------- to reflect its waiver of collection of the $x overpayment.

Law and Analysis

Section 61 provides that gross income means all income from whatever source derived
except as otherwise provided in subtitle A of the Code, including pensions and income
from discharge of indebtedness. Section 61(a)(11) and (12).

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

Accordingly, based on the information submitted and representations and assumptions
made, we conclude that you do not include in income under § 61 the Department’s
forgiveness of your obligation to repay the $x pension overpayment. Thus, you should
not report this $x on your ------- Form 1040, U.S. Individual Income Tax Return, even if

1
 For purposes of this ruling we have assumed that you included in your gross income your salary
payments (including your after-tax contributions to the Pension Plan) during the years you actually or
constructively received them.
PLR-105098-17                                3

you receive a Form 1099-C for ------- from the Department reflecting its waiver of the
collection of the $x overpayment.

Pursuant to section 7.06 of Rev. Proc. 2017-1, 2017-1 I.R.B 1, you must attach a copy
of this letter ruling to any federal income tax to which it is relevant. If you file your
returns electronically, you may satisfy this requirement by attaching a statement to your
return that provides the date and control number of this letter ruling.

Except as expressly provided herein, we do not express or imply an opinion concerning
the tax consequences of any aspect of any transaction or item discussed or referenced
in this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

In accordance with the Power of Attorney on file with this office, we are sending a copy
of this letter ruling to your authorized representative.


                                      Sincerely,



                                      Michael J. Montemurro
                                      Branch Chief
                                      Office of Associate Chief Counsel
                                      (Income Tax & Accounting)




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