§860C — Taxation of residual interests
Statute Text — 26 U.S.C. §860C
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.
The daily portion referred to in paragraph (1) shall be determined—
by allocating to each day in any calendar quarter its ratable portion of the taxable income (or net loss) for such quarter, and
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.
For purposes of this section—
The taxable income of a REMIC shall be determined under an accrual method of accounting and, except as provided in regulations, in the same manner as in the case of an individual, except that—
regular interests in such REMIC (if not otherwise debt instruments) shall be treated as indebtedness of such REMIC,
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),
there shall not be taken into account any item of income, gain, loss, or deduction allocable to a prohibited transaction,
the deductions referred to in section 703(a)(2) (other than any deduction under section 212) shall not be allowed, and
the amount of the net income from foreclosure property (if any) shall be reduced by the amount of the tax imposed by section 860G(c).
The net loss of any REMIC is the excess of—
the deductions allowable in computing the taxable income of such REMIC, over
its gross income.
Such amount shall be determined with the modifications set forth in paragraph (1).
Any distribution by a REMIC—
shall not be included in gross income to the extent it does not exceed the adjusted basis of the interest, and
to the extent it exceeds the adjusted basis of the interest, shall be treated as gain from the sale or exchange of such interest.
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.
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:
any distributions to such person with respect to such interest, and
any net loss of such REMIC taken into account under subsection (a) by such person with respect to such interest.
Any amount taken into account under subsection (a) by any holder of a residual interest in a REMIC shall be treated as ordinary income or ordinary loss, as the case may be.
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 holder’s 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).
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.
For special treatment of income in excess of daily accruals, see section 860E.
Treasury Regulations
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Treas. Reg. §1.860C-1Taxation 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—
(i) 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—
(i) 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.”
(d) For rules on the proper accounting for income from inducement fees, see § 1.446-6.
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Treas. Reg. §1.860C-1(a)Pass-thru of income or loss.
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.
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Treas. Reg. §1.860C-1(b)Adjustments to basis of residual interests—(1) Increase in basis.
Adjustments to basis of residual interests—(1) Increase in basis. A holder's basis in a residual interest is increased by—
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Treas. Reg. §1.860C-1(c)Counting conventions.
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.”
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Treas. Reg. §1.860C-1(d)For rules on the proper accounting for income from inducement fees, see § 1.
For rules on the proper accounting for income from inducement fees, see § 1.446-6.
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Treas. Reg. §1.860C-1(i)§1.860C-1(i)
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.
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Treas. Reg. §1.860C-2Determination 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. (i) A REMIC is allowed a deduction, determined without regard to section 163(d), for any interest expense accrued during the taxable year.
(ii) For taxable years beginning after December 31, 2017, a REMIC is allowed a deduction, determined without regard to section 163(j), 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).
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Treas. Reg. §1.860C-2(a)Treatment of gain or loss.
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.
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Treas. Reg. §1.860C-2(b)Deductions allowable to a REMIC—(1) In general.
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. (i) A REMIC is allowed a deduction, determined without regard to section 163(d), for any interest expense accrued during the taxable year.
(ii) For taxable years beginning after December 31, 2017, a REMIC is allowed a deduction, determined without regard to section 163(j), 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).
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