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Freddie Mac Comments on Reproposed WHFITs Regs

DEC. 3, 2002

Freddie Mac Comments on Reproposed WHFITs Regs

DATED DEC. 3, 2002
DOCUMENT ATTRIBUTES
  • Authors
    Millerick, Richard S.
  • Institutional Authors
    Freddie Mac
  • Cross-Reference
    For a summary of REG-106871-00, see Tax Notes, Jun. 24, 2002,

    p. 1898; for the full text, see Doc 2002-14871 (20 original

    pages) [PDF], 2002 TNT 121-78 Database 'Tax Notes Today 2002', View '(Number', or H&D, Jun. 20, 2002, p.

    3579.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2003-1032 (3 original pages)
  • Tax Analysts Electronic Citation
    2003 TNT 11-26
December 03, 2002

 

CC:ITA:RU(REG-106871-00)

 

Room 5226

 

Internal Revenue Service

 

PO Box 7604

 

Ben Franklin Station

 

Washington, DC 20044

 

 

Attn.: Ms. Faith Colson

 

Ms. Viva Hammer

 

Mr. Guy Traynor

 

Subject: IRS Reproposed Regulations on Reporting Requirements for Widely Held Fixed Investment Trusts

 

Dear Ms. Colson, Ms. Hammer and Mr. Traynor:

[1] Freddie Mac is pleased to submit comments on the recently reproposed regulations on reporting requirements for widely held fixed investment trusts ("WHFITs") published in the Federal Register on June 19, 2002. Freddie Mac apologizes for submitting its comments after the deadline. Freddie Mac is the trustee of participation certificates ("PCs") representing interests in pools of mortgages with a current aggregate outstanding principal balance in excess of one trillion dollars. Pursuant to the reproposed regulations, these PCs and other similar arrangements of which substantially all of the assets are mortgages will constitute a widely held mortgage trust ("WHMT"), a specific type of WHFIT. Freddie Mac, therefore, is directly and significantly affected by the reproposed regulations and by any subsequent final regulations.

[2] Freddie Mac generally supports the issuance of the reproposed regulations and believes that they constitute a welcome step toward a more efficient and effective reporting system for WHFITs and WHMTs. The 1998 proposed regulations required a trustee of a WHFIT holding a pool of debt instruments subject to section 1272(a)(6)(C)(iii) to report certain market discount information. Satisfying the reporting requirement for such pools presumably would have required the use of a method that utilized a reasonable prepayment assumption. The implication of these proposed rules was that section 1272(a)(6)(C)(iii) applies to mortgage pools. Freddie Mac was concerned that it was not at all clear that section 1272(a)(6)(C)(iii) applies to mortgage pools. Based on the legislative history, it appears that Congress was focused on the application of that section to credit card receivables and did not consider its application to mortgage pools. Moreover, even if that section were applied to mortgage pools, there are technical and mechanical questions about its implementation in this context. Freddie Mac questioned whether the promulgation of reporting regulations was the appropriate forum in which to address this particular issue.

[3] The IRS and Treasury were sensitive to Freddie Mac's concern, as evidenced by the statement in the preamble to the 2002 reproposed regulations that "[p]ending the issuance of guidance under section 1272(a)(6)(C)(iii), a trustee may, but is not required, by these reproposed regulations, to provide market discount and OID information that is calculated consistent with the application of section 1272(a)(6)(C)(iii)." Freddie Mac applauds the IRS and Treasury for not addressing the scope of section 1272(a)(6)(C)(iii) in the context of the reporting regulations project.

[4] In a recent industry group conference, there was a question asked relating to the proper methodology for accruing market discount on a pool of mortgages outside the context of the methodology described in section 1272(a)(6). Section 1276(b) provides that market discount accrues ratably unless the holder elects to accrue market discount on the instrument on a constant yield to maturity basis. Section 1276(b)(3) authorizes the Treasury to issue regulations regarding the determination of accrued market discount with respect to an instrument whose principal is payable in installments. No such regulations have been issued, but the legislative history to section 1276(b)(3) provides that ratable accrual in this context means based on the ratio of the amount of OID accrued or interest paid to the holder in a given period over the total remaining OID or interest payable on the instrument as of the beginning of such period. See H.R. Rep. No. 841, 99th Cong., 2d Sess. II-842 (1986).

[5] Consequently, based on the legislative history, a trustee could comply with its market discount reporting obligations by providing holders with a fraction based on the ratio of either OID accrued or interest paid during a given period over the total remaining OID or interest payable on the instrument as of the beginning of the period. This fraction would be based on the stated term of the mortgages, taking into account prepayments occurring prior to the accrual period. (Note that any premium would also be amortized over the stated term of the mortgages, using the same methodology.)

[6] Although we generally support the reproposed regulations, Freddie Mac does suggest that the IRS and Treasury incorporate the following comments regarding: (1) the reporting of the gross proceeds from the sale or the disposition of a trust asset; and (2) the trustee's obligation to retain records.

 

(1) If any trust asset has been sold or otherwise disposed of, the reproposed regulations require the trustee to report, among other things, the sales proceeds received by the trust for the trust asset, the date of sale or disposition of the trust asset, and the percentage of that trust that has been disposed of or sold. See Prop. Reg. §1.671-5(c)(2)(iii). The reproposed regulations also provide that if a de minimis test is met, the trustee is only required to provide the date of each sale or disposition and certain information regarding the sale proceeds received by the trust with respect to the sale or disposition. Freddie Mac recommends that the reporting requirement for sales and dispositions be eliminated for WHMTs. While the de minimis test provides a measure of relief from the full reporting obligation, there is still an obligation to report sales and dispositions separately from scheduled/unscheduled principal payments. This requirement imposes a significant burden on trustees. We believe that reporting the total amount of principal collections received in a given month, regardless of whether it is a scheduled principal payment, an unscheduled principal payment or the proceeds of a sale or disposition, satisfies the information needs of investors in a WHMT. With this information, the holder can calculate the appropriate gain or loss or accrual of premium or discount for such period. In such a case, the purpose behind the reporting requirement is met without imposing an unnecessary and uncertain reporting obligation on trustees.

(2) The reproposed regulations require the trustee to maintain in its records, for the duration of the trust and for five years afterward, a copy of the information provided to requesting persons for each reporting period and all supporting material as is necessary to establish the accuracy of the information provided. See Prop. Reg. § 1.671-5(c)(7). Under such a requirement, the trustee of a WHMT may be required to retain the relevant information for a period of up to 35 years. Freddie Mac believes it is reasonable to limit the length of time that the trustee is required to retain records to 10 years, starting from the end of the reporting period to which the information relates. A 10-year limit would still exceed the term for which a taxpayer is subject to the substantial understatement penalty under section 6501 and also would ease the significant administrative burden imposed on the trustee.

 

[7] Thank you for considering our comments. If you should have any questions, please contact Richard J. Power, Jr., Associate Tax Counsel at (703) 714-3058 or me at (703) 714-3150.
Sincerely yours,

 

 

Richard S. Millerick

 

Vice President -- Corporate Tax

 

Freddie Mac

 

McLean, Virginia
DOCUMENT ATTRIBUTES
  • Authors
    Millerick, Richard S.
  • Institutional Authors
    Freddie Mac
  • Cross-Reference
    For a summary of REG-106871-00, see Tax Notes, Jun. 24, 2002,

    p. 1898; for the full text, see Doc 2002-14871 (20 original

    pages) [PDF], 2002 TNT 121-78 Database 'Tax Notes Today 2002', View '(Number', or H&D, Jun. 20, 2002, p.

    3579.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2003-1032 (3 original pages)
  • Tax Analysts Electronic Citation
    2003 TNT 11-26
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