§860F — Title 26 Internal Revenue Code | U.S. Code

Summary

A REMIC, a special entity that holds pools of mortgages, pays a tax equal to 100 percent of any net income it earns from prohibited transactions. These include selling a mortgage outside a few allowed situations (like a swap for a replacement mortgage, a foreclosure or default, bankruptcy, or a complete liquidation), earning income from assets it is not allowed to hold, charging fees for services, and gains from selling certain cash flow investments. A qualified liquidation must sell all assets and pay out the proceeds within 90 days of adopting the liquidation plan. When someone transfers property to a REMIC in exchange for interests in it, no gain or loss is recognized at that time; instead, the tax basis carries over and any difference between basis and issue price is taken into income or deducted over time. If a REMIC distributes property, it is taxed as if it sold the property at fair market value. For the wash sale rules, a residual interest in a REMIC is treated as a security, and the usual 30-day window becomes 6 months. For tax filing purposes, a REMIC is treated like a partnership and its residual interest holders like partners.

Title 26, §860F

Internal Revenue Code — Source: USLM XML via OLRC

(a)(1)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)For purposes of this part, the term “prohibited transaction” means—

(A)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 (or the repurchase in lieu of substitution of a defective obligation),

(ii)a disposition incident to the foreclosure, default, or imminent default of the mortgage,

(iii)the bankruptcy or insolvency of the REMIC, or

(iv)a qualified liquidation.

(B)The receipt of any income attributable to any asset which is neither a qualified mortgage nor a permitted investment.

(C)The receipt by the REMIC of any amount representing a fee or other compensation for services.

(D)Gain from the disposition of any cash flow investment other than pursuant to any qualified liquidation.

(3)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)For purposes of this part—

(A)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)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.

(5)Notwithstanding subparagraphs (A) and (D) of paragraph (2), the term “prohibited transaction” shall not include any disposition—

(A)required to prevent default on a regular interest where the threatened default resulted from a default on 1 or more qualified mortgages, or

(B)to facilitate a clean-up call (as defined in regulations).

(b)(1)(A)No gain or loss shall be recognized to the transferor on the transfer of any property to a REMIC in exchange for regular or residual interests in such REMIC.

(B)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)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 REMIC will be in existence.

(D)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 REMIC will be in existence.

(2)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)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)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)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). Such return shall be filed by the REMIC. The determination of who may sign such return shall be made without regard to the first sentence of this subsection.

Notes & Related Subsidiaries

Editorial Notes

Amendments

1996—Subsec. (a)(5). Pub. L. 104–188 substituted “paragraph (2)” for “paragraph (1)” in introductory provisions. 1988—Subsec. (a)(2)(A). Pub. L. 100–647, § 1006(t)(3)(B)(i), struck out at end “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.” Subsec. (a)(2)(A)(i). Pub. L. 100–647, § 1006(t)(3)(A), amended cl. (i) generally. Prior to amendment, cl. (i) read as follows: “the substitution of a qualified replacement mortgage for a qualified mortgage,”. Subsec. (a)(2)(A)(iii), (C). Pub. L. 100–647, § 1006(t)(22)(B), (C), substituted “REMIC” for “real estate mortgage pool”. Subsec. (a)(2)(D). Pub. L. 100–647, § 1006(t)(3)(C), struck out “described in subsection (b)” before period at end. Subsec. (a)(5). Pub. L. 100–647, § 1006(t)(3)(B)(ii), added par. (5). Subsec. (b)(1)(A). Pub. L. 100–647, § 1006(t)(4), substituted “the transfer of any property to a REMIC in exchange for regular or residual interests in such REMIC” for “the transfer of any property to a REMIC”. Subsec. (b)(1)(C)(ii). Pub. L. 100–647, § 1006(t)(22)(D), substituted “REMIC” for “real estate mortgage pool”. Subsec. (b)(1)(D)(ii). Pub. L. 100–647, § 1006(t)(14), (22)(E), amended cl. (ii) identically, substituting “REMIC” for “real estate mortgage pool”. Subsec. (e). Pub. L. 100–647, § 1006(t)(18)(A), inserted at end “Such return shall be filed by the REMIC. The determination of who may sign such return shall be made without regard to the first sentence of this subsection.”

Statutory Notes and Related Subsidiaries

Effective Date

of 1988 Amendment Pub. L. 100–647, title I, § 1006(t)(18)(B), Nov. 10, 1988, 102 Stat. 3426, provided that: “Unless the REMIC otherwise elects, the amendment made by subparagraph (A) [amending this section] shall not apply to any REMIC where the start-up day (as defined in section 860G(a)(9) of the 1986 Code as in effect on the day before the date of the enactment of this Act [Nov. 10, 1988]) is before the date of the enactment of this Act.” Amendment by section 1006(t)(3), (4), (14), (22)(B)–(E) of 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.

§860F Other Rules