Financial Solutions Group Comments on Guidance Waiving Penalties Under WHFIT Reporting Rules

The following comments are being made by Steven Neiss¹ in behalf of Broadridge Financial Solutions Inc.² Tax Information Reporting Services³ in response to Notice 2008-77 that waives penalties for calendar year 2008 for trustees and middlemen reporting of Widely Held Fixed Investment Trusts (WHFIT) under regulation 1.671-5(m). We applaud the IRS' decision to waive penalties, especially at a time when mortgage securitizing has had a direct affect on the US economy. This provides an opportunity for the IRS, trustees and middlemen to re-evaluate the WHFIT regulations and implement workable procedures. We have provided recommendations for WHFIT standardization of data, the need for a WHFIT Directory and the necessity for WHFIT recipient Forms 1099 reporting.

STANDARDIZATION OF TRUSTEE DATA

Differences in the way Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation ("Freddie Mac). Federal National Mortgage Association (Fannie Mae) and other trustees present data

Ginnie Mae, Freddie Mac and Fannie Mae have all provided their 2007 programming layouts and specifications. Fannie Mae provided data for 496,663 CUSIPs and Freddie Mac had 315,349 CUSIPS. Although Ginnie Mae could not provide their 2007 data on time, HUD and Bank of New York (BONY), their servicing agent, did subsequently provide data for their 300,000 issues (GNMA I and GNMA II).

We are working directly with these government agencies to obtain the proper calculation of their data elements. We had not anticipated problems however after reviewing the sample files from the three government agencies it appears that the fields are being represented differently. For example, the "Ending Unpaid Balance", Ginnie Mae has it as a dollar amount, Freddie Mac and Fannie Mae as a factor but their computations are different. Freddie Mac provides it as a monthly factor and Fannie Mae provides a factor that needs to be divided by 1000. These government agencies have agreed to provide factor data through January of the following year and in the case of Freddie Mac 75D, through February of the following year.

We are identifying the differences and are programming them in order to compute the proper amounts for our clients. However, we are concerned with the non-government agency WHMTs. In order to provide accurate reporting we will need to know each trustees methodology. Standardization of data is a must.

Recommendation: The IRS should provide guidance to non-government agency trustees in the standardization of WHMT data elements.

Recommendation: The IRS should direct non-government agency trustees to provide a 13 month WHMT schedule.

Recommendation: The IRS should direct trustees to provide the payable dates associated to the monthly factors.

Recommendation: Original issue discount, interest and expenses should be expressed in a daily factor form per $1000 of par.

Middlemen may think that WHFITs are generally the same as Real Estate Mortgage Investment Conduit (REMIC) reporting. Issuers of REMIC provide interest and OID accrual factors that just need to be multiplied by the holder's position and number of days held. Not so with WHFIT.

Recommendation: The IRS should direct trustees to provide their data in a final standardized form so that middlemen could multiply the factors without going through complicated calculations.

We have recently received WHMT statements for tax year 2007. In inquiring as to why the statements were sent so late, trustees replied that they had requested and received an IRS extension to October 15. This presents a problem for middlemen. In anticipation of a WHMT statement, brokers reverse interest and principal anticipating receipt of trustee spreadsheets in February or March. If the spreadsheets are not forthcoming middlemen have no option but to reprocess the paid income and principal as a correction. When the statement is eventually received another correction may need to be processed.

Recommendation: In the event trustees request an IRS extension, the IRS should publish on their web the CUSIPS and descriptions of WHFIT for whom the IRS approved an extension.

WHFIT PUBLICATION

We have coordinated with the largest servicing agents of REMICS as they are also data providers for WHMTs. We have had much success. For example, we recently received 4,700 CUSIPS from Wells Fargo. We have also had good cooperation from JP Morgan (BONY/Mellon) and US Bank supplying thousands of deals and associated CUSIPS. However in matching these thousands of CUSIPS to our potential non-government WHMTs, only a small numbers of CUSIPS matched.

Certain service providers have communicated reluctance in providing lists of deals, CUSIPS or data for non-government agency WHMTs.

These are some of their comments:

"understand that this is non public information and I therefore am unable to supply it. Sorry I am can't be more helpful."

"Unfortunately -- we do not have a comprehensive listing that we can release of the transactions that we handle. We do not provide a listing of our REMIC classes and at this time are not planning on releasing a listing on the WHFITS. If you have a particular item that you are looking for, please feel free to send a request over to our REMIC Hotline and someone can advise you Thanks"

"can appreciate your predicament; however, there are some constraints on our end as well. I believe part of the problem lies in how the bonds are held (in the name of CEDE & Co.) I will have to discuss this with my management team as to what our practical options are. I have a feeling that the IRS did not fully anticipate or understand some of the consequences of the WHFIT legislation."

"XXXX forwarded your memo to me. Presently, we do not know in advance whether an entity is considered a WHFIT or not. This is determined primarily by whether or not a portion of a grantor trust is held through a nominee and this is done as we process each deal. Because we report all the required OID and other WHFIT related reporting directly to the individual holder or to the nominee, we don't separately identify an item on our website as being a WHFIT or not."

"WHFIT grantor trust data cannot be distributed freely to anyone who asks; it contains tax ID numbers and other confidential information that we can only give to the investors. Those reports you will need to get from the investors themselves. If you need other information regarding the deal, you can look up the factors for these deals on our website. Additionally, I cannot provide you with a list of CUSIPS identified as WHFITs for those that we service. If you have questions regarding whether or not a deal is a WHFIT, I can look those up for you. Please let me know if you have any other questions."

In additions to the obstacles as indicated above, none of the affected CUSIPs have "WHMT" in their descriptions and therefore identification of WHFITs presents a problem for middlemen. We need a source of WHFIT CUSIPs.

The Securities Industry Association (now known as The Securities Industry Financial Markets Association) recognized this problem and made suggestions in comments and discussions with the IRS. That effort commenced in 1998 in response to Reg. 209813-96 (August 13, 1998) and re-proposed Reg. 106871-00 (June 20, 2002). The comment letters had a prevailing theme: The need for an IRS directory, publication or web location that provided CUSIP numbers, security descriptions and trustee contact information similar to Pub 938, Real Estate Mortgage Investment Conduits (REMIC) Reporting Information or a publication such as Pub. 1212, Guide to Original Issue Discount (OID) Instruments. In 2002, the Information Reporting Program Advisory Committee (IRPAC) submitted comments regarding the re-proposed regulations governing the tax reporting for WHFITs. IRPAC recommended that the IRS either publish a directory listing of affected trusts or a publication that provides trust information. In 2006, in behalf of IRPAC, I authored comments in response to TD 9241 (February 13, 2006). IRPAC on November 16, 2006 at the IRPAC Public Meeting presented their comments. IRPAC conceded that there was no need for government agency (GNMA, SSMA & FHLMC) CUSIP information as those were generally readily available however there was a definite need for identification of other WHFIT securities (non-government agency Widely Held Mortgage Trusts and Non-Mortgage Widely Held Fixed Investment Trusts.)

The IRS issued T.D. 9279 (August 2, 2006) and T.D. 9308 (December 29, 2006). T.D. 9308 was finalized without an IRS commitment to create a directory. However, they did include the following regarding an IRS directory:

Requirement to Register and Continued Consideration of a WHFIT Directory Prior to the publication of the WHFIT reporting rules, commentators expressed concern that middlemen would not be able to identify a client's investment as an investment in a WHFIT and suggested that the IRS publish a directory or list of WHFITs that would include the name and CUSIP number of each WHFIT, along with the name, address and telephone number of the WHFIT's representative. Commentators noted that a publicly available directory or list would assist middlemen and brokers in identifying a client's investment as an investment in a WHFIT and in locating the WHFIT's representative. The WHFIT reporting rules did not provide for a directory and instead, required the trustee to identify a representative of the trust to provide trust information in a publication generally read by and available to requesting persons, in the trust's prospectus, or on the trustee's Internet website.

Recommendation: The IRS needs to require that non-government agency WHMT and NMWHFIT trustees file a form like Form 8811 (Information Return for REMICS). Upon filing the form, the instrument is included in an IRS publication (such as Pub. 938) or on the IRS website.

WHFIT FORM 1099 RECIPIENT REPORTING

The WHFIT regulations require 1099 reporting to the IRS and a written tax information statement to the recipient, trust interest holder (TIH). However there are no provisions for reporting the 1099 information to the recipient on Form 1099. Also there is no provision on the TIH statement that states that the 1099 information is being reported to the IRS ("This is important tax information and is being reported to the Internal Revenue Service. If you are required to file a return, a negligence penalty of other sanction may be imposed on you if this income is taxable and the IRS determines that it has not been reported.") This is the only occurrence where 1099 information is reportable to the IRS but not reported on a Form 1099 to the recipient. This will be very confusing for taxpayers, especially those who are holders of REMICs and UITs. REMIC holders receive an additional written statement that provides accrual periods, adjusted issue price, interest, original issue discount, expenses and market discount fraction. In addition to the additional written statement, REMIC interest and OID is reported to the recipient on Form 1099-OID. WHMT have generally the same data elements as REMICs. However, the interest and OID are not required to be reported on a Form 1099 to the recipient. In addition holders of Unit Investment Trusts have received Forms 1099 for income and proceeds for the past 20 years. Now under the WHFIT regulations they may receive only the TIH statement. As a result, preparers may not recognize the TIH statement in lieu of Forms 1099 and may fail to report the income on the taxpayer's return. Such a failure may result in underreporting of income and IRS may subject the taxpayer to mandatory backup withholding under the requirements for Notified Payee Underreporting on Interest and Dividends.

Recommendation: The IRS should require 1099 recipient reporting whenever 1099 WHFIT reporting to the IRS is required.

Recommendation: The IRS should not require a TIH statement when all the WHFIT income is reported to recipients and the IRS on a Form 1099.

Recommendation: The IRS should permit payors to report principal payments individually instead of cumulative amounts.

We wish to thank the Service for the opportunity to comment on the WHFIT regulations. Hopefully the IRS will consider our points of view for WHFIT standardization, the need of a Directory and recipient Forms 1099 reporting. If you have any questions, please do not hesitate in contacting me at (201) 714-3401 or steve.neiss@broadridge.com.

² Broadridge Financial Solutions, Inc., formerly ADP Brokerage Services Group, with over $2.0 billion in revenues and more than 40 years of experience, is a leading global provider of technology-based outsourcing solutions to the financial services industry. Broadridge's integrated systems and services include investor communication, securities processing, and clearing and outsourcing solutions. Broadridge offers advanced, integrated systems and services that are dependable, scalable and cost-efficient. Their systems help reduce the need for clients to make significant capital investments in operations infrastructure, thereby allowing them to increase their focus on core business activities.

³ Broadridge launched its Tax Information Reporting Service (TIRS) in 2005 to support the year-end information reporting needs of brokerage firms and banks. Its solutions provide comprehensive tax information reporting services through the development and maintenance of a database and processing that provides a platform for tax calculations and reporting in order to meet tax reporting requirements for IRS Forms 1099. The service includes processing for debt instruments with Original Issue Discount (OID); real estate mortgage investment conduits (REMICs) and other collateralized debt obligations (CDOs); real estate investment trusts (REITs) and mutual funds, unit investment trusts (UITs) and Master Limited Partnerships (MLP). TIRS is currently working with trustees of Widely Held Fixed Investment Trusts to calculate tax reporting information in behalf of its brokerage clients.