Temporary and Proposed Regs Provide Rules Relating to REMIC Regular Interests

 [4830-01-u]

 ACTION: Temporary regulations.

 SUMMARY: This document contains temporary regulations relating to the qualification of an interest as a regular interest in a real estate mortgage investment conduit, or REMIC. This action is necessary because of changes to the applicable tax law made by the Tax Reform Act of 1986 and by the Technical and Miscellaneous Revenue Act of 1988. The temporary regulations provide guidance to REMIC sponsors and investors. A portion of the text of these temporary regulations also serves as the partial text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.

 DATES: These regulations are effective April 4, 1994. FOR FURTHER INFORMATION CONTACT: Carol A. Schwartz, (202) 622-3920 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document modifies income tax regulations (26 CFR part 1) under section 860G of the Internal Revenue Code (Code), published in the Federal Register on December 24, 1992, (57 FR 61293). Section 671 of the Tax Reform Act of 1986 (the 1986 Act), Pub. L. 99-514, 100 Stat. 2308, added sections 860A through 860G and amended other sections of the Code to provide rules relating to REMICs. Section 1006(t) of the Technical and Miscellaneous Revenue Act of 1988 (TANRA), Pub. L. 100-647, 102 Stat. 3419, amended section 671 of the 1986 Act. These provisions generally take effect, under section 675(a) of the 1986 Act, as amended by section 1006(w)(1) of TAMRA, on January 1, 1987.

EXPLANATION OF PROVISIONS

 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). 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 as provided in regulations. 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 section 1.860G-1(a)(3) identifies the variable rates that are permitted under section 860G(a)(1)(B). These include "a rate that is a qualifying variable rate for purposes of sections 1271 through 1275 and the related regulations." Section 1.860G-1(a)(3)(i).

 Notice 93-11, 1993-1 C.B. 298, which interprets section 1.860G- 1(a)(3)(i), explains the meaning of "qualifying variable rate" by reference to proposed regulations under section 1275 that were published in the Federal Register on December 22, 1992 (57 FR 60750). Under the notice, a "qualifying variable rate" is a qualified floating rate (as defined in proposed section 1.1275-5(b)(1)) set at a current value (as defined in proposed section 1.1275-5(a)(4)). The regulations under section 1275 were revised and published in their final form in the Federal Register on February 2, 1994 (59 FR 4799). Those regulations became effective on April 4, 1994. Taxpayers could rely on Notice 93-11 until that date.

 The temporary regulations contained in this document supersede current section 1.860G-1(a)(3)(i) to conform with the final regulations under section 1275. Under the temporary regulations, a variable rate includes a qualified floating rate as defined in section 1.1275-5(b)(1) (without the application of paragraphs (b)(2) and (3) of that section, concerning the use of caps, floors, governors, and certain multiples) set at a current value.

 The temporary regulations are generally effective for obligations issued on or after April 4, 1994. The temporary regulations will not apply, however, to certain obligations priced before April 4, 1994, and transferred on or before June 1, 1994.

SPECIAL ANALYSES

 It has been determined that this Treasury decision 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, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

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.

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 1 is amended as follows:

PART 1 -- INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows:

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

Section 1.860G-1T also issued under 26 U.S.C. 860G(a)(1)(B)(i) and (e).

Par. 2. Section 1.860G-1T is added to read as follows:

SECTION 1.860G-1T REGULAR INTERESTS BEARING INTEREST AT A RATE BASED ON A CURRENT INTEREST RATE (TEMPORARY).

(a) RATE BASED ON A CURRENT INTEREST RATE. A qualified floating rate as defined in section 1.1275-5(b)(1) (but without the application of paragraph (b)(2) or (3) of that section) set at a current value, as defined in section 1.1275-5(a)(4), is a variable rate. In addition, a rate equal to the highest, lowest, or average of two or more qualified floating rates is a variable rate. For example, a rate based on the average cost of funds of one or more financial institutions is a variable rate.

(b) EFFECT ON SECTION 1.860G-1. All references in section 1.860G-1 to paragraph (a)(3)(i) must be read as references to paragraph (a) of this section.

(c) EFFECTIVE DATE -- (1) IN GENERAL. This section is effective April 4, 1994.

(2) RATE BASED ON CURRENT INTEREST RATE. Paragraphs (a) and (b) of this section apply to obligations intended to qualify as regular interests that are issued on or after April 4, 1994, unless the obligations are described in paragraph (c)(4) of this section.

(3) RATE BASED ON INDEX. Section 1.860G-1(a)(3)(i) (as contained in 26 CFR part 1 revised as of April 1, 1994) does not apply to obligations intended to qualify as regular interests that are issued on or after April 4, 1994, unless the obligations are described in paragraph (c)(4) of this section.

(4) TRANSITION OBLIGATIONS. Obligations are described in this paragraph (c)(4) if --

(i) The terms of the obligations and the prices at which the obligations will be offered are fixed before April 4, 1994; and

(ii) On or before June 1, 1994, a substantial portion of the obligations will be 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.