Real Estate Mortgage Investment Conduits

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[FI-10-94]

RIN 1545-AS54

Real Estate Mortgage Investment Conduits

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary

regulations and notice of public hearing.

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SUMMARY: In the Rules and Regulations section of this issue of the

Federal Register, the IRS is issuing temporary regulations relating to

permitted variable interest rates for regular interests in real estate

mortgage investment conduits, or REMICs. A portion of the text of those

temporary regulations also serves as the partial text of these proposed

regulations. The remaining text of these proposed regulations concerns

permitted specified portion interest rates for regular interests and

effective dates. This document also provides notice of a public hearing

on these proposed regulations.

DATES: Written comments must be received by June 20, 1994. Outlines of

topics to be discussed at the public hearing scheduled for July 22,

1994, at 10 a.m. must be received by July 1, 1994.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (FI-10-94), room 5228,

Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,

DC 20044. In the alternative, submissions may be hand delivered to:

CC:DOM:CORP:T:R (FI-10-94), room 5228, Internal Revenue Service, 1111

Constitution Avenue NW., Washington, DC. The public hearing will be

held in the Auditorium, Internal Revenue Building, 1111 Constitution

Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Carol A.

Schwartz, (202) 622-3920; concerning submissions and the hearing, Carol

Savage, (202) 622-8452 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Temporary regulations in the Rules and Regulations portion of this

issue of the Federal Register amend the Income Tax Regulations (26 CFR

part 1) contained in Sec. 1.860G-1(a)(3)(i) concerning permitted

variable interest rates for REMIC regular interests. A portion of the

text of those temporary regulations also serves as a partial text of

these proposed regulations. The preamble to the temporary regulations

explains the temporary regulations.

This notice of proposed rulemaking also contains rules under

Sec. 1.860G-1(a)(2)(i) that are not in the temporary regulations. These

rules concern interest rates, applicable to a REMIC regular interest,

that consist of a ``specified portion.''

For an entity to qualify as a REMIC, every interest in the entity

must be a residual interest or a regular interest. The term ``regular

interest'' is defined in section 860G(a)(1) of the Internal Revenue

Code. Section 860G(a)(1)(B) requires that any interest payments on a

regular interest be based on a fixed rate or on a variable rate.

Interest payments on a regular interest may also consist of a specified

portion of the interest payments on qualified mortgages held by a

REMIC, provided the specified portion does not vary while the regular

interest is outstanding.

Current Sec. 1.860G-1(a)(2)(i) (A), (B), and (C) identifies the

specified portions that are permitted under section 860G(a)(1)(B).

Paragraph (a)(2)(i)(A) describes a portion that can be expressed as a

percentage of the interest payable on some or all of the qualified

mortgages held by the REMIC. The qualified mortgages, however, must

bear interest at a fixed rate or at a permitted variable rate. This

limitation prevents the REMIC from passing through as interest certain

contingent payments that may be associated with the qualified

mortgages.

Taxpayers have requested that the IRS clarify that a REMIC may

issue a specified portion regular interest (sometimes called an

``Interest Only'' interest or ``IO'') expressed as a percentage of the

interest payable on an IO acquired from another REMIC. The proposed

regulations, which are proposed to be effective for entities whose

startup day is on or after November 12, 1991, clarify that issue. The

IRS and Treasury Department specifically invite comments regarding

whether further guidance under 1.860G-1(a)(2)(i) is necessary.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. Therefore,

a regulatory assessment is not required. It also has been determined

that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and, therefore, a Regulatory

Flexibility Analysis is not required. Pursuant to section 7805(f) of

the Internal Revenue Code, this notice of proposed rulemaking will be

submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments that are submitted

timely (preferably a signed original and eight copies) to the IRS. All

comments will be available for public inspection and copying.

A public hearing has been scheduled for Friday, July 22, 1994, at

10 a.m. in the IRS Auditorium. Because of access restrictions, visitors

will not be admitted beyond the Internal Revenue Building lobby more

than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must

submit written comments by June 20, 1994, and submit an outline of the

topics to be discussed and the time to be devoted to each topic by July

1, 1994.

A period of 10 minutes will be allotted to each person for making

comments.

An agenda showing the scheduling of the speakers will be prepared

after the deadline for receiving outlines has passed. Copies of the

agenda will be available free of charge at the hearing.

Drafting Information

The principal authors of these regulations are Carol A. Schwartz

and Marshall Feiring, Office of Assistant Chief Counsel (Financial

Institutions and Products). However, other personnel from the IRS and

Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read as

follows:

Authority: 26 U.S.C. 7805 * * *.

Par. 2. Section 1.860A-0 is amended by:

1. Adding an entry for Sec. 1.860A-1(b)(4).

2. Revising the entry for Sec. 1.860G-1(a)(3)(i).

3. The addition and revision read as follows:

Sec. 1.860A-0 Outline of REMIC provisions.

* * * * *

Sec. 1.860A-1 Effective dates and transition rules.

* * * * *

(b) * * *

(4) Rate based on current interest rate.

(i) In general.

(ii) Rate based on index.

(iii) Transition obligations.

* * * * *

Sec. 1.860G-1 Definition of regular and residual interests.

(a) * * *

(3) * * *

(i) Rate based on current interest rate.

* * * * *

Par. 3. Section 1.860A-1 is amended by adding paragraph (b)(4) to

read as follows:

Sec. 1.860A-1 Effective dates and transition rules.

* * * * *

(b) * * *

(4) Rate based on current interest rate--(i) In general. Section

1.860G-1(a)(3)(i) 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)(i) (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 Sec. 1.860D-

1(c)(3)) whose startup date (as defined in section 860G(a)(9) and

Sec. 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.

Par. 4. Section 1.860G-1 is amended by adding paragraph

(a)(2)(i)(D) to read as follows:

Sec. 1.860G-1 Definition of regular and residual interests.

(a) * * *

(2) * * *

(i) * * *

(D) A fixed percentage of the interest that is payable on some or

all of the qualified mortgages if--

(1) Each qualified mortgage is a regular interest issued by another

REMIC; and

(2) With respect to that other REMIC, the regular interest bears

interest that can be expressed as a specified portion as described in

Sec. 1.860G-1(a)(2)(i)(A), (B), or (C). See Sec. 1.860A-1(a) for the

effective date of paragraph (a)(2)(i)(D) of this section.

Sec. 1.860G-1 [Amended]

Par. 5. Section 1.860G-1, paragraph (a)(3)(i) is revised as

follows:

[The text of this proposed paragraph is the same as the text of

Sec. 1.860G-1T(a) published elsewhere in this issue of the Federal

Register].

Michael P. Dolan,

Acting Commissioner of Internal Revenue.

[FR Doc. 94-9549 Filed 4-15-94; 2:05 pm]

BILLING CODE 4830-01-U