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US Internal Revenue Service: 10667904

US Internal Revenue Service: 10667904

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Published by: IRS on Nov 30, 2007
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[4830-01-p] Published August 25, 2004
DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Part 1REG-106679-04RIN 1545-BD18Interest-only REMIC Regular Interests
AGENCY: Internal Revenue Service (IRS), Treasury.ACTION: Advance notice of proposed rulemaking.SUMMARY: This document describes and explains rules that theIRS and Treasury are considering and may propose in a notice ofproposed rulemaking regarding the proper timing of income ordeduction attributable to an interest-only regular interest in aReal Estate Mortgage Investment Conduit (REMIC). This documentalso invites comments from the public regarding these rules andother alternative rules. All materials submitted will beavailable for public inspection and copying.DATES: Written or electronic comments must be received byNovember 23, 2004.ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-106679-04),room
5203, Internal Revenue Service, PO Box 7604, Ben FranklinStation, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and4 p.m. to CC:PA:LPD:PR (REG-106679-04), Courier's Desk, Internal
Revenue Service, 1111 Constitution Avenue, NW., Washington, DC,or sent electronically, via the IRS Internet site atwww.irs.gov/regsor via the Federal eRulemaking Portal atwww.regulations.gov(indicate IRS and REG-106679-04).FOR FURTHER INFORMATION CONTACT: Concerning submissions ofcomments, Treena Garrett (202) 622-7180; concerning theproposals, Dale S. Collinson, (202) 622-3900 (not toll-freenumbers).SUPPLEMENTARY INFORMATION:BACKGROUNDThe Tax Reform Act of 1986
(100 Stat. 2085)
(1986-3C.B. Vol. 1), created a new tax entity, the Real Estate MortgageInvestment Conduit (REMIC), that was designed to be theexclusive vehicle for the issuance of multi-class mortgage-backed securities. A REMIC may issue one or more classes ofregular interests and must issue a single class of residualinterest. Section 860B(a) of the Internal Revenue Code (Code)requires that a regular interest be treated as a debt instrumentwhether or not the interest would qualify as a debt instrumentunder general tax principles. The holders of the residualinterest are required to take into account their proportionateshare of the REMIC’s taxable income or net loss.Prior to 1988, the holder of a REMIC regular interestwas required to be entitled to a specified principal amount plus
interest at a fixed or variable rate. The Technical andMiscellaneous Revenue Act of 1988 (102 Stat. 3342) (1988 C.B.1), permits the holder of a REMIC regular interest to receiveinterest that consists of a specified portion of the interestpayments on qualified mortgages if the portion does not varyduring the period the regular interest is outstanding.Section 860G(a)(1)(B)(ii). The expanded definition of REMICregular interest has allowed for the issuance of interest-onlyREMIC regular interests (REMIC IOs).A REMIC IO generally provides for a nominal (or zero)specified principal amount and stated interest consisting of aspecified portion of the interest payments on mortgages held bythe REMIC.
Section 860B(a) provides that a REMIC regularinterest is taxed as a debt instrument. Nevertheless, a REMICIO differs from a traditional debt instrument in that theaggregate of the amounts received by the holder of a REMIC IOmay be less than the amount for which the instrument was issued.This may occur if the underlying mortgages are prepaid at anunexpectedly rapid rate. In that case, the amounts of interestpaid on these mortgages will be less than expected, and the
The terms of a REMIC may provide that the specified principal amount of aREMIC IO is zero. Although section 860G(a)(1)(A) requires a regular interest“unconditionally [to] entitle[] the holder to receive a specified principalamount (or other similar amount),” §1.860G-1(a)(2)(iv) states, “If aninterest in a REMIC consists of a specified portion of the interest paymentson the REMIC’s qualified mortgages, no minimum specified principal amountneed be assigned to that interest.”

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