1 (iv) Caps and floors. (v) Funds-available caps. (B) Facts and circumstances test. 1 (C) Examples. (vi) Combination of rates. (4) Fixed terms on the startup day. (b) Special rules for regular interests. (2) Customary prepayment penalties received with respect to qualified mortgages. (3) Certain contingencies disregarded. (1) Prepayments, income, and expenses. (11) Credit losses. (111) Subordinated interests. (iv) Deferral of interest. (v) Prepayment interest shortfalls. (vi) Remote and incidental contingencies. (4) Form of regular interest. (5) Interest disproportionate to principal. (1) In general. (11) Exception. (6) Regular interest treated as a debt instrument for all Federal income tax purposes. (c) Residual interest. (d) Issue price of regular and residual interests. (1) In general. (2) The public. (a) Obligations principally secured by an interest in real property. (1) Tests for determining whether an obligation is principally secured. (1) The 80-percent test. (11) Alternative test. (2) Treatment of liens. (3) Safe harbor. (1) Reasonable belief that an obligation is principally secured. (11) Basis for reasonable belief. (iii) Later discovery that an obligation is not principally secured. (4) Interests in real property; real property. (5) Obligations secured by an interest in real property. (6) Obligations secured by other obligations; residual interests. (7) Certain instruments that call for contingent payments are obligations. (8) Defeasance. (9) Stripped bonds and coupons. (b) Assumptions and modifications. (1) Significant modifications are treated as exchanges of obligations. (2) Significant modification defined. (3) Exceptions. (4) Modifications that are not significant modifications. (5) Assumption defined. (6) Pass-thru certificates. (c) Treatment of certain credit enhancement contracts. (1) In general. (2) Credit enhancement contracts. (3) Arrangements to make certain ad vances. (111) Temporary period. (2) Qualified reserve funds. (3) Qualified reserve asset. (1) In general. (11) Reasonably required reserve. (A) In general. (B) Presumption that a reserve is reason ably required. (C) Presumption may be rebutted. (h) Outside reserve funds. (1) Contractual rights coupled with regular interests in tiered arrangements. (1) In general. (2) Example. (1) Clean-up call. (1) In general. (2) Interest rate changes. (3) Safe harbor. (k) Startup day. Section 1.860G-3 Treatment of foreign persons. (a) Transfer of a residual interest with tax avoidance potential. (1) In general. (2) Tax avoidance potential. (1) Defined. (11) Safe harbor. (3) Effectively connected income. (4) Transfer by a foreign holder. (b) [Reserved] [T.D. 8458, 57 FR 61299, Dec. 24, 1992; 58 FR 15089, Mar. 19, 1993, as amended by T.D. 8614, 60 FR 42787, Aug. 17, 1995] § 1.860A-1 Effective dates and transition rules. (a) In general. Except as otherwise provided in paragraph (b) of this section, the regulations under sections 860A through 860G are effective only for a qualified entity (as defined in §1.860D-1(c)(3)) whose startup day (as defined in section 860G(a)(9) and §1.860G-2(k)) is on or after November 12, 1991. (b) Exceptions-(1) Reporting regulations (i) Sections 1.860D-1(c) (1) and (3), and §1.860D-1(d) (1) through (3) are effective after December 31, 1986. (ii) Sections 1.860F-4 (a) through (e) are effective after December 31, 1986 and are applicable after that date except as follows: (A) Section 1.860F-4(c)(1) is effective for REMICs with a startup day on or after November 10, 1988. (B) Sections 1.860F-4(e)(1)(ii) (A) and (B) are effective for calendar quarters and calendar years beginning after December 31, 1988. (C) Section 1.860F-4(e)(1)(ii)(C) is effective for calendar quarters and cal endar years beginning after December 31, 1986 and ending before January 1, 1988. (D) Section 1.860F-4(e)(1)(ii)(D) is effective for calendar quarters and calendar years beginning after December 31, 1987 and ending before January 1, 1990. (2) Tax avoidance rules—(1) Transfers of certain residual interests. Section 1.860E-1(c) (concerning transfers of noneconomic residual interests) and §1.860G-3(a)(4) (concerning transfers by a foreign holder to a United States person) are effective for transfers of residual interests on or after September 27, 1991. (ii) Transfers to foreign holders. Generally, §1.860G-3(a) (concerning transfers of residual interests to foreign holders) is effective for transfers of residual interests after April 20, 1992. However, §1.860G-3(a) does not apply to a transfer of a residual interest in a REMIC by the REMIC's sponsor (or by another transferor contemporaneously with formation of the REMIC) on or before June 30, 1992, if— (A) The terms of the regular interests and the prices at which regular interests were offered had been fixed on or before April 20, 1992; (B) on or before June 30, 1992, a substantial portion of the regular interests in the REMIC were transferred, with the terms and at the prices that were fixed on or before April 20, 1992, to investors who were unrelated to the REMIC's sponsor at the time of the transfer; and (C) At the time of the transfer of the residual interest, the expected future distributions on the residual interest were equal to at least 30 percent of the anticipated excess inclusions (as defined in §1.860E-2(a)(3)), and the transferor reasonably expected that the transferee would receive sufficient distributions from the REMIC at or after the time at which the excess inclusions accrue in an amount sufficient to satisfy the taxes on the excess inclusions. (iii) Residual interests that lack significant value. The significant value requirement in §1.860E-1(a) (1) and (3) (concerning excess inclusions accruing to organizations to which section 593 applies) generally is effective for residual interests acquired on or after September 27, 1991. The significant value requirement in §1.860E-1(a) (1) and (3) does not apply, however, to residual interests acquired by an organization to which section 593 applies as a sponsor at formation of a REMIC in a transaction described in §1.860F-2(a)(1) if more than 50 percent of the interests in the REMIC (determined by reference to issue price) were sold to unrelated investors before November 12, 1991. The exception from the significant value requirement provided by the preceding sentence applies only so long as the sponsor owns the residual interests. (3) Excise taxes. Section 1.860E-2(a)(1) is effective for transfers of residual interests to disqualified organizations after March 31, 1988. Section 1.860E2(b)(1) is effective for excess inclusions accruing to pass-thru entities after March 31, 1988. (4) Rate based on current interest rate(1) In general. Section 1.860G-1(a)(3)(1) applies to obligations (other than transition obligations described in paragraph (b)(4)(iii) of this section) intended to qualify as regular interests that are issued on or after April 4, 1994. (ii) Rate based on index. Section 1.860G-1(a)(3)(1) (as contained in 26 CFR part 1 revised as of April 1, 1994) applies to obligations intended to qualify as regular interests that (A) Are issued by a qualified entity (as defined in §1.860D-1(c)(3)) whose startup date (as defined in section 860G(a)(9) and §1.860G-2(k)) is on or after November 12, 1991; and (B) Are either (1) Issued before April 4, 1994; or (2) Transition obligations described in paragraph (b)(4)(iii) of this section. (iii) Transition obligations. Obligations are described in this paragraph (b)(4)(iii) if— (A) The terms of the obligations and the prices at which the obligations are offered are fixed before April 4, 1994; and (B) On or before June 1, 1994, a substantial portion of the obligations are transferred, with the terms and at the prices that are fixed before April 4, 1994, to investors who are unrelated to the REMIC's sponsor at the time of the transfer. [T.D. 8458, 57 FR 61300, Dec. 24, 1992; 58 FR 8098, Feb. 11, 1993; 58 FR 15089, Mar. 19, 1993; T.D. 8614, 60 FR 42787, Aug. 17, 1995] 81.860C-1 Taxation of holders of residual interests. (a) Pass-thru of income or loss. Any holder of a residual interest in a REMIC must take into account the holder's daily portion of the taxable income or net loss of the REMIC for each day during the taxable year on which the holder owned the residual interest. (b) Adjustments to basis of residual interests (1) Increase in basis. A holder's basis in a residual interest is increased by (1) The daily portions of taxable income taken into account by that holder under section 860C(a) with respect to that interest; and (ii) The amount of any contribution described in section 860G(d)(2) made by that holder. (2) Decrease in basis. A holder's basis in a residual interest is reduced (but not below zero) by— (1) First, the amount of any cash or the fair market value of any property distributed to that holder with respect to that interest; and (ii) Second, the daily portions of net loss of the REMIC taken into account under section 860C(a) by that holder with respect to that interest. (3) Adjustments made before disposition. If any person disposes of a residual interest, the adjustments to basis prescribed in paragraph (b) (1) and (2) of this section are deemed to occur immediately before the disposition. (c) Counting conventions. For purposes of determining the daily portion of REMIC taxable income or net loss under section 860C(a)(2), any reasonable convention may be used. An example of a reasonable convention is "30 days per month/90 days per quarter/360 days per year." [T.D. 8458, 57 FR 61301, Dec. 24, 1992] §1.860C-2 Determination of REMIC taxable income or net loss. (a) Treatment of gain or loss. For purposes of determining the taxable income or net loss of a REMIC under section 860C(b), any gain or loss from the disposition of any asset, including a qualified mortgage (as defined in section 860G(a)(3)) or a permitted investment (as defined in section 860G(a)(5) and §1.860G-2(g)), is treated as gain or loss from the sale or exchange of property that is not a capital asset. (b) Deductions allowable to a REMIC(1) In general. Except as otherwise provided in section 860C(b) and in paragraph (b) (2) through (5) of this section, the deductions allowable to a REMIC for purposes of determining its taxable income or net loss are those deductions that would be allowable to an individual, determined by taking into account the same limitations that apply to an individual. (2) Deduction allowable under section 163. A REMIC is allowed a deduction, determined without regard to section 163(d), for any interest expense accrued during the taxable year. (3) Deduction allowable under section 166. For purposes of determining a REMIC's bad debt deduction under section 166, debt owed to the REMIC is not treated as nonbusiness debt under section 166(d). (4) Deduction allowable under section 212. A REMIC is not treated as carrying on a trade or business for purposes of section 162. Ordinary and necessary operating expenses paid or incurred by the REMIC during the taxable year are deductible under section 212, without regard to section 67. Any expenses that are incurred in connection with the formation of the REMIC and that relate to the organization of the REMIC and the issuance of regular and residual interests are not treated as expenses of the REMIC for which a deduction is allowable under section 212. See §1.860F-2(b)(3)(ii) for treatment of those expenses. (5) Expenses and interest relating to tax-exempt income. Pursuant to section 265(a), a REMIC is not allowed a deduction for expenses and interest allocable to tax-exempt income. The portion of a REMIC's interest expense that is allocable to tax-exempt interest is determined in the manner prescribed in section 265(b)(2), without regard to section 265(b)(3). [T.D. 8458, 57 FR 61301, Dec. 24, 1992] § 1.860D-1 Definition of a REMIC. (a) In general. A real estate mortgage investment conduit (or REMIC) is a qualified entity, as defined in paragraph (c)(3) of this section, that satisfies the requirements of section 860D(a). See paragraph (d)(1) of this section for the manner of electing REMIC status. (b) Specific requirements (1) Interests in a REMIC—(i) In general. A REMIC must have one class, and only one class, of residual interests. Except as provided in paragraph (b)(1)(ii) of this section, every interest in a REMIC must be either a regular interest (as defined in section 860G(a)(1) and §1.860G-1(a)) or a residual interest (as defined in section 860G(a)(2) and §1.860G-1(c)). (ii) De minimis interests. If, to facilitate the creation of an entity that elects REMIC status, an interest in the entity is created and, as of the startup day (as defined in section 860G(a)(9) and §1.860G-2(k)), the fair market value of that interest is less than the lesser of $1,000 or 1/1,000 of one percent of the aggregate fair market value of all the regular and residual interests in the REMIC, then, unless that interest is specifically designated as an interest in the REMIC, the interest is not treated as an interest in the REMIC for purposes of section 860D(a) (2) and (3) and paragraph (B)(1)(i) of this section. (2) Certain rights not treated as interests. Certain rights are not treated as interests in a REMIC. Although not an exclusive list, the following rights are not interests in a REMIC. (1) Payments for services. The right to receive from the REMIC payments that represent reasonable compensation for services provided to the REMIC in the ordinary course of its operation is not an interest in the REMIC. Payments made by the REMIC in exchange for services may be expressed as a specified percentage of interest payments due on qualified mortgages or as a specified percentage of earnings from permitted investments. For example, a mortgage servicer's right to receive reasonable compensation for servicing the mortgages owned by the REMIC is not an interest in the REMIC. (ii) Stripped interests. Stripped bonds or stripped coupons not held by the REMIC are not interests in the REMIC even if, in a transaction preceding or contemporaneous with the formation of the REMIC, they and the REMIC's qualified mortgages were created from the same mortgage obligation. For example, the right of a mortgage servicer to receive a servicing fee in excess of reasonable compensation from payments it receives on mortgages held by a REMIC is not an interest in the REMIC. Further, if an obligation with a fixed principal amount provides for interest at a fixed or variable rate and for certain contingent payment rights (e.g., a shared appreciation provision or a percentage of mortgagor profits provision), and the owner of the obligation contributes the fixed payment rights to a REMIC and retains the contingent payment rights, the retained contingent payment rights are not an interest in the REMIC. (iii) Reimbursement rights under credit enhancement contracts. A credit enhancer's right to be reimbursed for amounts advanced to a REMIC pursuant to the terms of a credit enhancement contract (as defined in §1.860G-2 (c)(2)) is not an interest in the REMIC even if the credit enhancer is entitled to receive interest on the amounts advanced. (iv) Rights to acquire mortgages. The right to acquire or the obligation to purchase mortgages and other assets from a REMIC pursuant to a clean-up call (as defined in §1.860G-2(j)) or a qualified liquidation (as defined in section 860F(a)(4)), or on conversion of a convertible mortgage (as defined in §1.860G-2(d)(5)), is not an interest in the REMIC. (3) Asset test-(1) In general. For purposes of the asset test of section 860D(a)(4), substantially all of a qualified entity's assets are qualified mortgages and permitted investments if the qualified entity owns no more than a de minimis amount of other assets. (ii) Safe harbor. The amount of assets other than qualified mortgages and permitted investments is de minimis if the aggregate of the adjusted bases of those assets is less than one percent of the aggregate of the adjusted bases of all of the REMIC's assets. Nonetheless, a qualified entity that does not meet this safe harbor may demonstrate that it owns no more than a de minimis amount of other assets. (4) Arrangements test. Generally, a qualified entity must adopt reasonable arrangements designed to ensure that (1) Disqualified organizations (as defined in section 860E(e)(5)) do not hold residual interests in the qualified entity; and (ii) If a residual interest is acquired by a disqualified organization, the qualified entity will provide to the Internal Revenue Service, and to the persons specified in section 860E(e)(3), information needed to compute the tax imposed under section 860E(e) on transfers of residual interests to disqualified organizations. (5) Reasonable arrangements-(1) Arrangements to prevent disqualified organizations from holding residual interests. A qualified entity is considered to have adopted reasonable arrangements to ensure that a disqualified organization (as defined in section 860E(e)(5)) will not hold a residual interest if (A) The residual interest is in registered form (as defined in §5f.103-1(c) of this chapter); and (B) The qualified entity's organizational documents clearly and expressly prohibit a disqualified organization from acquiring beneficial ownership of a residual interest, and notice of the prohibition is provided through a legend on the document that evidences ownership of the residual interest or through a conspicuous statement in a prospectus or private offering document used to offer the residual interest for sale. (ii) Arrangements to ensure that information will be provided. A qualified entity is considered to have made reasonable arrangements to ensure that the Internal Revenue Service and persons specified in section 860E(e)(3) as liable for the tax imposed under section 860E(e) receive the information needed to compute the tax if the qualified entity's organizational documents require that it provide to the Internal Revenue Service and those persons a computation showing the present value of the total anticipated excess inclusions with respect to the residual interest for periods after the transfer. See |