§ 860A. Taxation of REMIC’s

Legislative history

Reconstructed from this section’s Code source credit and amendment notes, resolved against the local Statutes at Large. Editorial notes are evidence, not the law that made the change.

1. 1986

   Tax Reform Act of 1986

   Pub. L. 99–514 title VI § 671(a) · 100 Stat. 2085

   Enacted · 26 U.S.C. § 860A

   Added Pub. L. 99–514, title VI, § 671(a), Oct. 22, 1986, 100 Stat. 2309

   Source evidence

   Code source credit
   Added Pub. L. 99–514, title VI, § 671(a), Oct. 22, 1986, 100 Stat. 2309

   Enacted provision · exact public law section
   (a) General Rule.— Subchapter M of chapter 1 (relating to regulated investment companies and real estate investment trusts) is amended by adding at the end thereof the following new part: “PART IV— REAL ESTATE MORTGAGE INVESTMENT CONDUITS “Sec. 860A. Taxation of REMIC’s. “Sec. 860B. Taxation of holders of regular interests “Sec. 860C. Taxation of residual interests “Sec. 860D. REMIC defined. “Sec. 860E. Treatment of income in excess of daily accruals on residual interests. “Sec. 860F. Other rules. “Sec. 860G. Other definitions and special rules “SEC 860A. TAXATION OF REMIC’s. “(a) General Rule.— Except as otherwise provided in this part, a REMIC shall not be subject to taxation under this chapter (and shall not be treated as a corporation, partnership, or trust for purposes of this chapter). “(b) Income Taxable to Holders.— The income of any REMIC shall be taxable to the holders of interests in such REMIC as provided in this part. “SEC. 860B. TAXATION OF HOLDERS OF REGULAR INTERESTS “(a) General Rule.— In determining the tax under this chapter of any holder of a regular interest in a REMIC, such interest (if not otherwise a debt instrument) shall be treated as a debt instrument. “(b) Holders Must Use Accrual Method.— The amounts includible in gross income with respect to any regular interest in a REMIC shall be determined under the accrual method of accounting. “(c) Portion of Gain Treated as Ordinary Income.— Gain on the disposition of a regular interest shall be treated as ordinary income to the extent such gain does not exceed the excess (if any) of— “(1) the amount which would have been includible in the gross income of the taxpayer with respect to such interest if the yield on such interest were 110 percent of the applicable Federal rate (as defined in section 1274(d) without regard to paragraph (2) thereof) as of the beginning of the taxpayer’s holding period, over “(2) the amount actually includible in gross income with respect to such interest by the taxpayer. “(d) Cross Reference.— “For special rules in determining inclusion of original issue discount on regular interests, see section )272(a)(6). “SEC. 860C. TAXATION OF RESIDUAL INTERESTS. “(a) Pass-Thru of Income or Loss.— “(1) In general.— In determining the tax under this chapter of any holder of a residual interest in a REMIC, such holder shall take into account his daily portion of the taxable income or net loss of such REMIC for each day during the taxable year on which such holder held such interest. “(2) Daily portion.— The daily portion referred to in paragraph (1) shall be determined— “(A) by allocating to each day in any calendar quarter its ratable portion of the taxable income (or net loss) for such quarter, and “(B) by allocating the amount so allocated to any day among the holders (on such day) of residual interests in proportion to their respective holdings on such day. “(b) Determination of Taxable Income or Net Loss —For purposes of this section.— “(1) Taxable income.— The taxable income of a REMIC shall be determined under an accrual method of accounting and in the same manner as in the case of an individual, except that— “(A) regular interests in such REMIC (if not otherwise debt instruments) shall be treated as indebtedness of such REMIC, “(B) market discount on any market discount bond shall be included in gross income for the taxable years to which it is attributable as determined under the rules of section 1276(b)(2) (and sections 1276(a) and 1277 shall not apply), “(C) there shall not be taken into account any item of income, gain, loss, or deduction allocable to a prohibited transaction, and “(D) the deductions referred to in section 703(a)(2) (other than any deduction under section 212) shall not be allowed. “(2) Net loss.— The net loss of any REMIC is the excess of— “(A) the deductions allowable in computing the taxable income of such REMIC, over “(B) its gross income. Such amount shall be determined with the modifications set forth in paragraph (1). “(c) Distributions.— Any distribution by a REMIC— “(1) shall not be included in gross income to the extent it does not exceed the adjusted basis of the interest, and “(2) to the extent it exceeds the adjusted basis of the interest, shall be treated as gain from the sale or exchange of such interest. “(d) Basis Rules.— “(1) Increase in basis.— The basis of any person’s residual interest in a REMIC shall be increased by the amount of the taxable income of such REMIC taken into account under subsection (a) by such person with respect to such interest. “(2) Decreases in basis.— The basis of any person’s residual interest in a REMIC shall be decreased (but not below zero) by the sum of the following amounts: “(A) any distributions to such person with respect to such interest, and “(B) any net loss of such REMIC taken into account under subsection (a) by such person with respect to such interest. “(e) Special Rules.— “(1) Amounts treated as ordinary income.— Any amount included in the gross income of any holder of a residual interest in a REMIC by reason of subsection (a) shall be treated as ordinary income. “(2) Limitation on losses.— “(A) In general.— The amount of the net loss of any REMIC taken into account by a holder under subsection (a) with respect to any calendar quarter shall not exceed the adjusted basis of such holders residual interest in such REMIC as of the close of such calendar quarter (determined without regard to the adjustment under subsection (d)(2)(B) for such calendar quarter). “(B) Indefinite carryforward.— Any loss disallowed by reason of subparagraph (A) shall be treated as incurred by the REMIC in the succeeding calendar quarter with respect to such holder “(3) Cross reference.— “For special treatment of income in excess of daily accruals, see section 860E. “SEC. 860D. REMIC DEFINED. “(a) General Rule.— For purposes of this title, the terms ‘real estate mortgage investment conduit’ and ‘REMIC’ mean any entity— “(1) to which an election to be treated as a REMIC applies for the taxable year and all prior taxable years, “(2) all of the interests in which are regular interests or residual interests, “(3) which has 1 (and only 1) class of residual interests (and all distributions, if any, with respect to such interests are pro ratal, “(4) as of the close of the 4th month ending after the startup day and each quarter ending thereafter, substantially all of the assets of which consist of qualified mortgages and permitted investments, and “(5) which has a taxable year which is a calendar year. “(b) Election.— “(1) In general.— An entity (otherwise meeting the requirements of subsection (a)) may elect to be treated as a REMIC for its 1st taxable year. Such an election shall be made on its return for such 1st taxable year. Except as provided in paragraph (2), such an election shall apply to the taxable year for which made and all subsequent taxable years. “(2) Termination.— “(A) In general.— If any entity ceases to be a REMIC at any time during the taxable year, such entity shall not be treated as a REMIC for such taxable year or any succeeding taxable year. “(B) Inadvertent terminations.—If— “(i) an entity ceases to be a REMIC, “(ii) the Secretary determines that such cessation was inadvertent, “(iii) no later than a reasonable time after the discovery of the event resulting in such cessation, steps are taken so that such entity is once more a REMIC, and “(iv) such entity, and each person holding an interest in such entity at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of such entity as a REMIC or a C corporation) as may be required by the Secretary with respect to such period, then, notwithstanding such terminating event, such entity shall be treated as continuing to be a REMIC (or such cessation shall be disregarded for purposes of subparagraph (A)) whichever the Secretary determines to be appropriate. “SEC 860E. TREATMENT OF INCOME IN EXCESS OF DAILY ACCRUALS ON RESIDUAL INTERESTS. “(a) Excess Inclusions May Not Be Offset by Net Operating Losses — “(1) In general.— Except as provided in paragraph (2), the taxable income of any holder of a residual interest in a REMIC for any taxable year shall in no event be less than the excess inclusion for such taxable year. “(2) Exception for certain financial institutions.— Paragraph (1) shall not apply to any organization to which section 593 applies. The Secretary may by regulations provide rhat the preceding sentence shall not apply where necessary or appropriate to prevent avoidance of tax imposed by this chapter. “(b) Organizations Subject to Unrelated Business Tax.— If the holder of any residual interest in a REMIC is an organization subject to the tax imposed by section 511, the excess inclusion of such holder for any taxable year shall be treated as unrelated business taxable income of such holder for purposes of section 511. “(c) Excess Inclusion.— For purposes of this section— “(1) In general.— The term ‘excess inclusion’ means, with respect to any residual interest in a REMIC for any calendar quarter, the excess (if any) of— “(A) the amount taken into account with respect to such interest by the holder under section 8600a), over “(B) the sum of the daily accruals with respect to such interest for days during such calendar quarter while held by such holder. To the extent provided in regulations, if residual interests in a REMIC do not have significant value, the excess inclusions with respect to such interests shall be the amount determined under subparagraph (A) without regard to subparagraph (B). “(2) Determination of daily accruals.— “(A) In general.— For purposes of this subsection, the daily accrual with respect to any residual interest for any day in any calendar quarter shall be determined by allocating to each day in such quarter its ratable portion of the product of— “(i) the adjusted issue price of such interest at the beginning of such quarter, and “(ii) 120 percent of the long-term Federal rate (determined on the basis of compounding at the close of each calendar quarter and properly adjusted for the length of such quarter). “(B) Adjusted issue price.— For purposes of this paragraph, the adjusted issue price of any residual interest at the beginning of any calendar quarter is the issue price of residual interest— “(i) increased by the amount of daily accruals for prior quarters, and “(ii) decreased by any distribution made with respect to such interest before the beginning of such quarter. “(C) Federal long-term rate.— For purposes of this paragraph, the term ’Federal long-term rate’ means the Federal long-term rate which would have applied to the residual interest under section 1274(d) (determined without regard to paragraph (2) thereoD if it were a debt instrument. “(d) Treatment of Residual Interests Held by Real Estate Investment Trusts.— If a residual interest in a REMIC is held by a real estate investment trust, under regulations prescribed by the Secretary— “(1) any excess of— “(A) the aggregate excess inclusions determined with respect to such interests, over “(B) the real estate investment trust taxable income (within the meaning of section 857(b)(2), excluding any net capital gain), shall be allocated among the shareholders of such trust in proportion to the dividends received by such shareholders from such trust, and “(2) any amount allocated to a shareholder under paragraph (1) shall be treated as an excess inclusion with respect to a residual interest held by such shareholder. “SEC. 860F. OTHER RULES. “(a) 100 Percent Tax on Prohibited Transactions “(1) Tax imposed.— There is hereby imposed for each taxable year of a REMIC a tax equal to 100 percent of the net income derived from prohibited transactions. “(2) Prohibited transaction.— For purposes of this part, the term ‘prohibited transaction’ means— “(A) Disposition of qualified mortgage.— The disposition of any qualified mortgage transferred to the REMIC other than a disposition pursuant to— “(i) the substitution of a qualified replacement mortgage for a qualified mortgage, “(ii) a disposition incident to the foreclosure, default, or imminent default of the mortgage, “(iii) the bankruptcy or insolvency of the real estate mortgage pool, or “(iv) a qualified liquidation. Notwithstanding the preceding sentence, the term ‘prohibited transaction shall not include any disposition required to prevent default on a regular interest where the threatened default resulted from a default on 1 or more qualified mortgages. “(B) Income from nonpermitted assets.— The receipt of any income attributable to any asset which is neither a qualified mortgage nor a permitted investment. “(C) Compensation for services.— The receipt by the real estate mortgage pool of any amount representing a fee or other compensation for services. “(D) Gain from disposition of cash flow investments.— Gain from the disposition of any cash flow investment other than pursuant to any qualified liquidation described in subsection (b). “(3) Determination of net income.— For purposes of paragraph (1), the term ‘net income derived from prohibited transactions’ means the excess of the gross income from prohibited transactions over the deductions allowed by this chapter which are directly connected with such transactions; except that there shall not be taken into account any item attributable to any prohibited transaction for which there was a loss. “(4) Qualified liquidation.— For purposes of this part— “(A) In general.— The term ‘qualified liquidation’ means a transaction in which— “(i) the REMIC adopts a plan of complete liquidation, “(ii) such REMIC sells all its assets (other than cash) within the liquidation period, and “(iii) all proceeds of the liquidation (plus the cash), less assets retained to meet claims, are credited or distributed to holders of regular or residual interests on or before the last day of the liquidation period. “(B) Liquidation period.— The term ‘liquidation period’ means the period— “(i) beginning on the date of the adoption of the plan of liquidation, and “(ii) ending at the close of the 90th day after such date. “(b) Treatment of Transfers to the REMIC.— “(1) Treatment of transferor.— “(A) Nonrecognition gain or loss.— No gain or loss shall be recognized to the transferor on the transfer of any property to a REMIC. “(B) Adjusted bases of interests.— The adjusted bases of the regular and residual interests received in a transfer described in subparagraph (A) shall be equal to the aggregate adjusted bases of the property transferred in such transfer. Such amount shall be allocated among such interests in proportion to their respective fair market values. “(C) Treatment of nonrecognized gain.— If the issue price of any regular or residual interest exceeds its adjusted basis as determined under subparagraph (B), for periods during which such interest is held by the transferor (or by any other person whose basis is determined in whole or in part by reference to the basis of such interest in the hand of the transferor)— “(i) in the case of a regular interest, such excess shall be included in gross income (as determined under rules similar to rules of section 1276(b)), and “(ii) in the case of a residual interest, such excess shall be included in gross income ratably over the anticipated period during which the real estate mortgage pool will be in existence. “(D) Treatment of nonrecognized loss.— If the adjusted basis of any regular or residual interest received in a transfer described in subparagraph (A) exceeds its issue price, for periods during which such interest is held by the transferor (or by any other person whose basis is determined in whole or in part by reference to the basis of such interest in the hand of the transferor)— “(i) in the case of a regular interest, such excess shall be allowable as a deduction under rules similar to the rules of section 171, and “(ii) in the case of a residual interest, such excess shall be allowable as a deduction ratably over the anticipated period during which the real estate mortgage pool will be in existence. “(2) Basis to remic.— The basis of any property received by a REMIC in a transfer described in paragraph (1)(A) shall be its fair market value immediately after such transfer. “(c) Distributions of Property.— If a REMIC makes a distribution of property with respect to any regular or residual interest— “(1) notwithstanding any other provision of this subtitle, gain shall be recognized to such REMIC on the distribution in the same manner as if it had sold such property to the distributee at its fair market value, and “(2) the basis of the distributee in such property shall be its fair market value. “(d) Coordination With Wash Sale Rules.— For purposes of section 1091— “(1) any residual interest in a REMIC shall be treated as a security, and “(2) in applying such section to any loss claimed to have been sustained on the sale or other disposition of a residual interest in a REMIC— “(A) except as provided in regulations, any residual interest in any REMIC and any interest in a taxable mortgage pool (as defined in section 7701(i)) comparable to a residual interest in a REMIC shall be treated as substantially identical stock or securities, and “(B) subsections (a) and (e) of such section shall be applied by substituting ‘6 months’ for ‘30 days’ each place it appears. “(e) Treatment Under Subtitle F.— For purposes of subtitle F, a REMIC shall be treated as a partnership (and holders of residual interests in such REMIC shall be treated as partners). Any return required by reason of the preceding sentence shall include the amount of the daily accruals determined under section 860E(c). “SEC. 860G. OTHER DEFINITIONS AND SPECIAL RULES. “(a) Definitions.— For purposes of this part— “(1) Regular interest.— The term ‘regular interest’ means an interest in a REMIC the terms of which are fixed on the startup day, and which— “(A) unconditionally entitles the holder to receive a specified principal amount (or other similar amount), and “(B) provides that interest payments (or other similar amounts), if any, at or before maturity are payable based on a fixed rate (or to the extent provided in regulations, at a variable rate). An interest shall not fail to meet the requirements of subparagraph (Al merely because the timing (but not the amount) of the principal payments (or other similar amounts) may be contingent on the extent of prepayments on qualified mortgages and the amount of income from permitted investments. “(2) Residual interest.— The term ‘residual interest’ means an interest in a REMIC which is not a regular interest and is designated as a residual interest. “(3) Qualified mortgage.— The term ‘qualified mortgage’ means— “(A) any obligation (including any participation or certificate of beneficial ownership therein) which is principally secured, directly or indirectly, by an interest in real property and which— “(i) is transferred to the REMIC on or before the startup day, or “(ii) is purchased by the REMIC within the 3-month period beginning on the startup day, “(B) any qualified replacement mortgage, and “(C) any regular interest in another REMIC transferred to the REMIC on or before the startup day. “(4) Qualified replacement mortgage.— The term ‘qualified replacement mortgage’ means any obligation— “(A) which would be described in paragraph (3)(A) if it were transferred to the REMIC on or before the startup day, and “(B) which is received for— “(i) another obligation within the 3-month period beginning on the startup day, or “(ii) a defective obligation within the 2-year period beginning on the startup day. “(5) Permitted investments.— The term ‘permitted investments’ means any— “(A) cash flow investment, “(B) qualified reserve asset, or “(C) foreclosure property. “(6) Cash flow investment.— The term ‘cash flow investment’ means any investment of amounts received under qualified mortgages for a temporary period before distribution to holders of interests in the REMIC. “(7) Qualified reserve asset.— “(A) In general.— The term ‘qualified reserve asset’ means any intangible property which is held for investment and as part of a qualified reserve fund. “(B) Qualified reserve fund.— For purposes of subparagraph (A), the term ‘qualified reserve fund’ means any reasonably required reserve to provide for full payment of expenses of the REMIC or amounts due on regular interests in the event of defaults on qualified mortgages. The amount of any such reserve shall be promptly and appropriately reduced as payments of qualified mortgages are received. “(C) Special rule.— A reserve shall not be treated as a qualified reserve for any taxable year (and all subsequent taxable years) if more than 30 percent of the gross income from the assets in such fund for the taxable year is derived from the sale or other disposition of property held for less than 3 months. For purposes of the preceding sentence, gain on the disposition of a qualified reserve asset shall not be taken into account if the disposition giving rise to such gain is required to prevent default on a regular interest where the threatened default resulted from a default on 1 or more qualified mortgages. “(8) Foreclosure property.— The term ‘foreclosure property’ means property— “(A) which would be foreclosure property under section 856(e) if acquired by a real estate investment trust, and “(B) which is acquired in connection with the default or imminent default of a qualified mortgage held by the REMIC. Property shall cease to be foreclosure property with respect to the REMIC on the date which is 1 year after the date such real estate mortgage pool acquired such property. “(9) Startup day.— The term ‘startup day’ means any day selected by a REMIC which is on or before the 1st day on which interests in such REMIC are issued. “(10) Issue price.— The issue price of any regular or residual interest in a REMIC shall be determined under section 1273(b) in the same manner as if such interest were a debt instrument; except that if the interest is issued for property, paragraph (3) of section 1273(b) shall apply whether or not the requirements of such paragraph are met. “(b) Treatment of Nonresident Aliens and Foreign Corporations.— If the holder of a residual interest in a REMIC is a non-resident alien individual or a foreign corporation, for purposes of sections 871(a), 881,1441, and 1442— “(1) amounts includible in the gross income of such holder under this part shall be taken into account when paid or distributed (or when the interest is disposed of), and “(2) no exemption from the taxes imposed by such sections (and no reduction in the rates of such taxes) shall apply to any excess inclusion. The Secretary may by regulations provide that such amounts shall be taken into account earlier than as provided in paragraph (1) where necessary or appropriate to prevent the avoidance of tax imposed by this chapter. “(c) Regulations.— The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this part, including regulations— “(1) to prevent unreasonable accumulations of assets in a REMIC, “(2) permitting determinations of the fair market value of property transferred to a REMIC and issue price of interests in a REMIC to be made earlier than otherwise provided, and “(3) requiring reporting to holders of residual interests of such information as frequently as is necessary or appropriate to permit such holders to compute their taxable income accurately.”

   Effective date note
   Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

2. 1988

   Technical and Miscellaneous Revenue Act of 1988

   Pub. L. 100–647 title I § 1006(t)(20) · 102 Stat. 3342

   Substituted · 26 U.S.C. § 860A(a)

   Pub. L. 100–647 substituted “this subtitle” for “this chapter” in two places

   Source evidence

   Code amendment note
   Subsec. (a). Pub. L. 100–647 substituted “this subtitle” for “this chapter” in two places.

   Enacted provision · exact public law section
   (20) Subsection (a) of section 860A of the 1986 Code is amended by striking out “this chapter” each place it appears and inserting in lieu thereof “this subtitle”.

   Effective date note
   Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

2 of 2 references resolved to an enrolled provision