Temporary and Proposed Regs Allow Reissuance of Mortgage Credit Certificates

 [4830-01-u]

 ACTION: Temporary regulations.

 SUMMARY: This document contains temporary regulations relating to the reissuance of mortgage credit certificates. Changes to the applicable law were made by the Tax Reform Act of 1984. The regulations provide guidance to issuers and holders of mortgage credit certificates. The text of the temporary regulations set forth in this document also serves as the text of the proposed regulations cross-referenced in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.

 DATES: These temporary regulations are effective December 22, 1993.

 For dates of applicability of the temporary regulations, see the Explanation of Provisions in the SUPPLEMENTARY INFORMATION portion of this document.

 FOR FURTHER INFORMATION CONTACT: L. Michael Wachtel, (202) 622-3980 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document adds temporary regulations to the Income Tax Regulations (26 CFR part 1) to provide guidance under section 25(e)(4) of the Internal Revenue Code (Code) with respect to the reissuance of mortgage credit certificates. Section 25(e)(4) was added to the Code by section 612 of the Tax Reform Act of 1984, 98 Stat. 494, 905.

EXPLANATION OF PROVISIONS

 Mortgage credit certificates are an alternative to qualified mortgage bonds. Section 143 of the Code permits the issuance of qualified mortgage bonds to provide assistance in financing the purchase of owner-occupied residences when certain income, purchase price, and other requirements are met. An issuer authorized to issue qualified mortgage bonds under section 143 may, instead, elect under section 25 to issue mortgage credit certificates. Under a qualified mortgage credit certificate program, the purchaser of a residence obtains conventional mortgage financing and is permitted a tax credit based on the interest paid on that mortgage.

 Section 25 incorporates by reference certain requirements set out for qualified mortgage bonds in section 143. One of those is the requirement in section 143(i)(1) that no part of the proceeds of such an issue is to be used to acquire or replace existing mortgages; thus, proceeds from qualified mortgage bonds cannot be used to refinance home mortgages.

 Section 25(e)(4), however, authorizes regulations to permit the reissuance of mortgage credit certificates under conditions designed to prevent any increase in the credit allowable to the certificate holder. Under the authority of section 25(e)(4), these temporary regulations allow the reissuance of mortgage credit certificates in connection with the refinancing of indebtedness to which an existing certificate applies. The regulations require that the reissued certificate be, in effect, a continuation of the existing certificate (with new financing) and that there be no increase in the amount of the tax credit.

 These regulations apply to reissuances of certificates with respect to certain past refinancings as well as current or future refinancings of home mortgages. A certificate must be reissued on or after December 22, 1993 and within 1 year after the refinancing. A reissued certificate is effective as of the date of the mortgage refinancing. To the extent otherwise permitted, the holder of a reissued certificate may file an amended federal income tax return to claim credits for the period from the date of refinancing.

SPECIAL ANALYSES

 It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. It has also been determined that section 553(b) of the Administrative Procedures 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 author of these regulations is L. Michael Wachtel, Office of the Assistant Chief Counsel (Financial Institutions and Products), IRS. 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 continues to read in part as follows:

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

Sections 1.25-1T - 1.25-8T also issued under 26 U.S.C. 25. * * *

Par. 2. Section 1.25-3T is amended as follows:

1. Paragraph (g)(1)(iii) is added.

2. Paragraph (p) is added.

3. These added provisions read as follows:

SECTION 1.25-3T QUALIFIED MORTGAGE CREDIT CERTIFICATE (TEMPORARY).

* * * * *

(g) * * * (1) * * *

(iii) REISSUED CERTIFICATE EXCEPTION. See paragraph (p) of this section for rules regarding the exception in the case of refinancing existing mortgages.

* * * * *

(p) REISSUED CERTIFICATES FOR CERTAIN REFINANCINGS -- (1) IN GENERAL. If the issuer of a qualified mortgage credit certificate reissues a certificate in place of an existing mortgage credit certificate to the holder of that existing certificate, the reissued certificate is treated as satisfying the requirements of this section. The period for which the reissued certificate is in effect begins with the date of the refinancing (that is, the date on which the closing agreement is signed).

(2) MEANING OF EXISTING CERTIFICATE. For purposes of this paragraph (p), a certificate is an existing certificate only if it satisfies the requirements of this section. An existing certificate may be the original certificate, a certificate issued to a transferee under paragraph (h)(2)(ii) of this section, or a certificate previously reissued under this paragraph (p).

(3) LIMITATIONS ON REISSUED CERTIFICATE. An issuer may reissue a mortgage credit certificate only if all of the following requirements are satisfied:

(i) The certificate is reissued to the holder of an existing certificate with respect to the same property to which the existing certificate relates.

(ii) The reissued certificate entirely replaces the existing certificate (that is, the holder cannot retain the existing certificate with respect to any portion of the outstanding balance of the certified mortgage indebtedness specified on the existing certificate).

(iii) The certified mortgage indebtedness specified on the reissued certificate does not exceed the outstanding balance of the certified mortgage indebtedness specified on the existing certificate.

(iv) The reissued certificate does not increase the certificate credit rate specified in the existing certificate.

(v) The reissued certificate does not result in an increase in the credit that would otherwise have been allowable to the holder under the existing certificate for any taxable year.

(vi) The issuer reissues the certificate on or after December 22, 1993 but not later than the date that is 1 year after the date of the refinancing.

(4) EXAMPLE. The following example illustrates the application of paragraph (p)(3)(v) of this section.

EXAMPLE. A holder of an existing certificate that meets the requirements of this section seeks to refinance the property to which the certificate relates. The final payment on the holder's existing mortgage is due on December 31, 2000; the final payment on the new mortgage would not be due until January 31, 2004. The holder requests that the issuer provide to the holder a reissued mortgage credit certificate in place of the existing certificate. The requested certificate would have the same certificate credit rate as the existing certificate. For each calendar year through the year 2000, the credit that would be allowable to the holder with respect to the new mortgage under the requested certificate would not exceed the credit allowable for that year under the existing certificate. The requested certificate, however, would allow the holder credits for the years 2001 through 2004, years for which, due to the earlier scheduled retirement of the existing mortgage, no credit would be allowable under the existing certificate. Under paragraph (p)(3)(v) of this section, the issuer may not reissue the certificate as requested because, under the existing certificate, no credit would be allowable for the years 2001 through 2004. The issuer may, however, provide a reissued certificate that limits the amount of the credit allowable in each year to the amount allowable under the existing certificate; for example, the reissued certificate could expire on December 31, 2000.