PART V—FINANCIAL ASSET SECURITIZATION INVESTMENT TRUSTS

        

Part Referred to in Other Sections

This part is referred to in section 382 of this title.

§860H. Taxation of a FASIT; other general rules

(a) Taxation of FASIT

A FASIT as such shall not be subject to taxation under this subtitle (and shall not be treated as a trust, partnership, corporation, or taxable mortgage pool).

(b) Taxation of holder of ownership interest

In determining the taxable income of the holder of the ownership interest in a FASIT—

(1) all assets, liabilities, and items of income, gain, deduction, loss, and credit of a FASIT shall be treated as assets, liabilities, and such items (as the case may be) of such holder,

(2) the constant yield method (including the rules of section 1272(a)(6)) shall be applied under an accrual method of accounting in determining all interest, acquisition discount, original issue discount, and market discount and all premium deductions or adjustments with respect to each debt instrument of the FASIT,

(3) there shall not be taken into account any item of income, gain, or deduction allocable to a prohibited transaction, and

(4) interest accrued by the FASIT which is exempt from tax imposed by this subtitle shall, when taken into account by such holder, be treated as ordinary income.

(c) Treatment of regular interests

For purposes of this title—

(1) a regular interest in a FASIT, if not otherwise a debt instrument, shall be treated as a debt instrument,

(2) section 163(e)(5) shall not apply to such an interest, and

(3) amounts includible in gross income with respect to such an interest shall be determined under an accrual method of accounting.

(Added Pub. L. 104–188, title I, §1621(a), Aug. 20, 1996, 110 Stat. 1858.)

Effective Date

Part effective Sept. 1, 1997, see section 1621(d) of Pub. L. 104–188, set out as an Effective Date of 1996 Amendment note under section 26 of this title.

§860I. Gain recognition on contributions to a FASIT and in other cases

(a) Treatment of property acquired by FASIT

(1) Property acquired from holder of ownership interest or related person

If property is sold or contributed to a FASIT by the holder of the ownership interest in such FASIT (or by a related person) gain (if any) shall be recognized to such holder (or person) in an amount equal to the excess (if any) of such property's value under subsection (d) on the date of such sale or contribution over its adjusted basis on such date.

(2) Property acquired other than from holder of ownership interest or related person

Property which is acquired by a FASIT other than in a transaction to which paragraph (1) applies shall be treated—

(A) as having been acquired by the holder of the ownership interest in the FASIT for an amount equal to the FASIT's cost of acquiring such property, and

(B) as having been sold by such holder to the FASIT at its value under subsection (d) on such date.

(b) Gain recognition on property outside FASIT which supports regular interests

If property held by the holder of the ownership interest in a FASIT (or by any person related to such holder) supports any regular interest in such FASIT—

(1) gain shall be recognized to such holder (or person) in the same manner as if such holder (or person) had sold such property at its value under subsection (d) on the earliest date such property supports such an interest, and

(2) such property shall be treated as held by such FASIT for purposes of this part.

(c) Deferral of gain recognition

The Secretary may prescribe regulations which—

(1) provide that gain otherwise recognized under subsection (a) or (b) shall not be recognized before the earliest date on which such property supports any regular interest in such FASIT or any indebtedness of the holder of the ownership interest (or of any person related to such holder), and

(2) provide such adjustments to the other provisions of this part to the extent appropriate in the context of the treatment provided under paragraph (1).

(d) Valuation

For purposes of this section—

(1) In general

The value of any property under this subsection shall be—

(A) in the case of a debt instrument which is not traded on an established securities market, the sum of the present values of the reasonably expected payments under such instrument determined (in the manner provided by regulations prescribed by the Secretary)—

(i) as of the date of the event resulting in the gain recognition under this section, and

(ii) by using a discount rate equal to 120 percent of the applicable Federal rate (as defined in section 1274(d)), or such other discount rate specified in such regulations, compounded semiannually, and

(B) in the case of any other property, its fair market value.

(2) Special rule for revolving loan accounts

For purposes of paragraph (1)—

(A) each extension of credit (other than the accrual of interest) on a revolving loan account shall be treated as a separate debt instrument, and

(B) payments on such extensions of credit having substantially the same terms shall be applied to such extensions beginning with the earliest such extension.

(e) Special rules

(1) Nonrecognition rules not to apply

Gain required to be recognized under this section shall be recognized notwithstanding any other provision of this subtitle.

(2) Basis adjustments

The basis of any property on which gain is recognized under this section shall be increased by the amount of gain so recognized.

(Added Pub. L. 104–188, title I, §1621(a), Aug. 20, 1996, 110 Stat. 1859.)

Treatment of Existing Securitization Entities

Section 1621(e) of Pub. L. 104–188 provided that:

"(1) In general.—In the case of the holder of the ownership interest in a pre-effective date FASIT—

"(A) gain shall not be recognized under section 860L(d)(2) of the Internal Revenue Code of 1986 on property deemed contributed to the FASIT, and

"(B) gain shall not be recognized under section 860I of such Code on property contributed to such FASIT,

until such property (or portion thereof) ceases to be properly allocable to a pre-FASIT interest.

"(2) Allocation of property to pre-fasit interest.—For purposes of paragraph (1), property shall be allocated to a pre-FASIT interest in such manner as the Secretary of the Treasury may prescribe, except that all property in a FASIT shall be treated as properly allocable to pre-FASIT interests if the fair market value of all such property does not exceed 107 percent of the aggregate principal amount of all outstanding pre-FASIT interests.

"(3) Definitions.—For purposes of this subsection—

"(A) Pre-effective date fasit.—The term 'pre-effective date FASIT' means any FASIT if the entity (with respect to which the election under section 860L(a)(3) of such Code was made) is in existence on August 31, 1997.

"(B) Pre-fasit interest.—The term 'pre-FASIT interest' means any interest in the entity referred to in subparagraph (A) which was issued before the startup day (other than any interest held by the holder of the ownership interest in the FASIT)."

Section Referred to in Other Sections

This section is referred to in section 860L of this title.

§860J. Non-FASIT losses not to offset certain FASIT inclusions

(a) In general

The taxable income of the holder of the ownership interest or any high-yield interest in a FASIT for any taxable year shall in no event be less than the sum of—

(1) such holder's taxable income determined solely with respect to such interests (including gains and losses from sales and exchanges of such interests), and

(2) the excess inclusion (if any) under section 860E(a)(1) for such taxable year.

(b) Coordination with section 172

Any increase in the taxable income of any holder of the ownership interest or a high-yield interest in a FASIT for any taxable year by reason of subsection (a) shall be disregarded—

(1) in determining under section 172 the amount of any net operating loss for such taxable year, and

(2) in determining taxable income for such taxable year for purposes of the second sentence of section 172(b)(2).

(c) Coordination with minimum tax

For purposes of part VI of subchapter A of this chapter—

(1) the reference in section 55(b)(2) to taxable income shall be treated as a reference to taxable income determined without regard to this section,

(2) the alternative minimum taxable income of any holder of the ownership interest or a high-yield interest in a FASIT for any taxable year shall in no event be less than such holder's taxable income determined solely with respect to such interests, and

(3) any increase in taxable income under this section shall be disregarded for purposes of computing the alternative tax net operating loss deduction.

(d) Affiliated groups

All members of an affiliated group filing a consolidated return shall be treated as one taxpayer for purposes of this section.

(Added Pub. L. 104–188, title I, §1621(a), Aug. 20, 1996, 110 Stat. 1860.)

§860K. Treatment of transfers of high-yield interests to disqualified holders

(a) General rule

In the case of any high-yield interest which is held by a disqualified holder—

(1) the gross income of such holder shall not include any income (other than gain) attributable to such interest, and

(2) amounts not includible in the gross income of such holder by reason of paragraph (1) shall be included (at the time otherwise includible under paragraph (1)) in the gross income of the most recent holder of such interest which is not a disqualified holder.

(b) Exceptions

Rules similar to the rules of paragraphs (4) and (7) of section 860E(e) shall apply to the tax imposed by reason of the inclusion in gross income under subsection (a).

(c) Disqualified holder

For purposes of this section, the term "disqualified holder" means any holder other than—

(1) an eligible corporation (as defined in section 860L(a)(2)), or

(2) a FASIT.

(d) Treatment of interests held by securities dealers

(1) In general

Subsection (a) shall not apply to any high-yield interest held by a disqualified holder if such holder is a dealer in securities who acquired such interest exclusively for sale to customers in the ordinary course of business (and not for investment).

(2) Change in dealer status

(A) In general

In the case of a dealer in securities which is not an eligible corporation (as defined in section 860L(a)(2)), if—

(i) such dealer ceases to be a dealer in securities, or

(ii) such dealer commences holding the high-yield interest for investment,

there is hereby imposed (in addition to other taxes) an excise tax equal to the product of the highest rate of tax specified in section 11(b)(1) and the income of such dealer attributable to such interest for periods after the date of such cessation or commencement.

(B) Holding for 31 days or less

For purposes of subparagraph (A)(ii), a dealer shall not be treated as holding an interest for investment before the thirty-second day after the date such dealer acquired such interest unless such interest is so held as part of a plan to avoid the purposes of this paragraph.

(C) Administrative provisions

The deficiency procedures of subtitle F shall apply to the tax imposed by this paragraph.

(e) Treatment of high-yield interests in pass-thru entities

(1) In general

If a pass-thru entity (as defined in section 860E(e)(6)) issues a debt or equity interest—

(A) which is supported by any regular interest in a FASIT, and

(B) which has an original yield to maturity which is greater than each of—

(i) the sum determined under clauses (i) and (ii) of section 163(i)(1)(B) with respect to such debt or equity interest, and

(ii) the yield to maturity to such entity on such regular interest (determined as of the date such entity acquired such interest),

there is hereby imposed on the pass-thru entity a tax (in addition to other taxes) equal to the product of the highest rate of tax specified in section 11(b)(1) and the income of the holder of such debt or equity interest which is properly attributable to such regular interest. For purposes of the preceding sentence, the yield to maturity of any equity interest shall be determined under regulations prescribed by the Secretary.

(2) Exception

Paragraph (1) shall not apply to arrangements not having as a principal purpose the avoidance of the purposes of this subsection.

(Added Pub. L. 104–188, title I, §1621(a), Aug. 20, 1996, 110 Stat. 1861.)

Section Referred to in Other Sections

This section is referred to in section 26 of this title.

§860L. Definitions and other special rules

(a) FASIT

(1) In general

For purposes of this title, the terms "financial asset securitization investment trust" and "FASIT" mean any entity—

(A) for which an election to be treated as a FASIT applies for the taxable year,

(B) all of the interests in which are regular interests or the ownership interest,

(C) which has only one ownership interest and such ownership interest is held directly by an eligible corporation,

(D) as of the close of the third month beginning after the day of its formation and at all times thereafter, substantially all of the assets of which (including assets treated as held by the entity under section 860I(b)(2)) consist of permitted assets, and

(E) which is not described in section 851(a).

A rule similar to the rule of the last sentence of section 860D(a) shall apply for purposes of this paragraph.

(2) Eligible corporation

For purposes of paragraph (1)(C), the term "eligible corporation" means any domestic C corporation other than—

(A) a corporation which is exempt from, or is not subject to, tax under this chapter,

(B) an entity described in section 851(a) or 856(a),

(C) a REMIC, and

(D) an organization to which part I of subchapter T applies.

(3) Election

An entity (otherwise meeting the requirements of paragraph (1)) may elect to be treated as a FASIT. Except as provided in paragraph (5), such an election shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.

(4) Termination

If any entity ceases to be a FASIT at any time during the taxable year, such entity shall not be treated as a FASIT after the date of such cessation.

(5) Inadvertent terminations, etc.

Rules similar to the rules of section 860D(b)(2)(B) shall apply to inadvertent failures to qualify or remain qualified as a FASIT.

(6) Permitted assets not treated as interest in FASIT

Except as provided in regulations prescribed by the Secretary, any asset which is a permitted asset at the time acquired by a FASIT shall not be treated at any time as an interest in such FASIT.

(b) Interests in FASIT

For purposes of this part—

(1) Regular interest

(A) In general

The term "regular interest" means any interest which is issued by a FASIT on or after the startup date with fixed terms and which is designated as a regular interest if—

(i) such interest unconditionally entitles the holder to receive a specified principal amount (or other similar amount),

(ii) interest payments (or other similar amounts), if any, with respect to such interest are determined based on a fixed rate, or, except as otherwise provided by the Secretary, at a variable rate permitted under section 860G(a)(1)(B)(i),

(iii) such interest does not have a stated maturity (including options to renew) greater than 30 years (or such longer period as may be permitted by regulations),

(iv) the issue price of such interest does not exceed 125 percent of its stated principal amount, and

(v) the yield to maturity on such interest is less than the sum determined under section 163(i)(1)(B) with respect to such interest.

An interest shall not fail to meet the requirements of clause (i) merely because the timing (but not the amount) of the principal payments (or other similar amounts) may be contingent on the extent that payments on debt instruments held by the FASIT are made in advance of anticipated payments and on the amount of income from permitted assets.

(B) High-yield interests

(i) In general

The term "regular interest" includes any high-yield interest.

(ii) High-yield interest

The term "high-yield interest" means any interest which would be described in subparagraph (A) but for—

(I) failing to meet the requirements of one or more of clauses (i), (iv), or (v) thereof, or

(II) failing to meet the requirement of clause (ii) thereof but only if interest payments (or other similar amounts), if any, with respect to such interest consist of a specified portion of the interest payments on permitted assets and such portion does not vary during the period such interest is outstanding.

(2) Ownership interest

The term "ownership interest" means the interest issued by a FASIT after the startup day which is designated as an ownership interest and which is not a regular interest.

(c) Permitted assets

For purposes of this part—

(1) In general

The term "permitted asset" means—

(A) cash or cash equivalents,

(B) any debt instrument (as defined in section 1275(a)(1)) under which interest payments (or other similar amounts), if any, at or before maturity meet the requirements applicable under clause (i) or (ii) of section 860G(a)(1)(B),

(C) foreclosure property,

(D) any asset—

(i) which is an interest rate or foreign currency notional principal contract, letter of credit, insurance, guarantee against payment defaults, or other similar instrument permitted by the Secretary, and

(ii) which is reasonably required to guarantee or hedge against the FASIT's risks associated with being the obligor on interests issued by the FASIT,

(E) contract rights to acquire debt instruments described in subparagraph (B) or assets described in subparagraph (D),

(F) any regular interest in another FASIT, and

(G) any regular interest in a REMIC.

(2) Debt issued by holder of ownership interest not permitted asset

The term "permitted asset" shall not include any debt instrument issued by the holder of the ownership interest in the FASIT or by any person related to such holder or any direct or indirect interest in such a debt instrument. The preceding sentence shall not apply to cash equivalents and to any other investment specified in regulations prescribed by the Secretary.

(3) Foreclosure property

(A) In general

The term "foreclosure property" means property—

(i) which would be foreclosure property under section 856(e) (determined without regard to paragraph (5) thereof) if such property were real property acquired by a real estate investment trust, and

(ii) which is acquired in connection with the default or imminent default of a debt instrument held by the FASIT unless the security interest in such property was created for the principal purpose of permitting the FASIT to invest in such property.

Solely for purposes of subsection (a)(1), the determination of whether any property is foreclosure property shall be made without regard to section 856(e)(4).

(B) Authority to reduce grace period

In the case of property other than real property and other than personal property incident to real property, the Secretary may by regulation reduce for purposes of subparagraph (A) the periods otherwise applicable under paragraphs (2) and (3) of section 856(e).

(d) Startup day

For purposes of this part—

(1) In general

The term "startup day" means the date designated in the election under subsection (a)(3) as the startup day of the FASIT. Such day shall be the beginning of the first taxable year of the FASIT.

(2) Treatment of property held on startup day

All property held (or treated as held under section 860I(b)(2)) by an entity as of the startup day shall be treated as contributed to such entity on such day by the holder of the ownership interest in such entity.

(e) Tax on prohibited transactions

(1) In general

There is hereby imposed for each taxable year of a FASIT a tax equal to 100 percent of the net income derived from prohibited transactions. Such tax shall be paid by the holder of the ownership interest in the FASIT.

(2) Prohibited transactions

For purposes of this part, the term "prohibited transaction" means—

(A) except as provided in paragraph (3), the receipt of any income derived from any asset that is not a permitted asset,

(B) except as provided in paragraph (3), the disposition of any permitted asset other than foreclosure property,

(C) the receipt of any income derived from any loan originated by the FASIT, and

(D) the receipt of any income representing a fee or other compensation for services (other than any fee received as compensation for a waiver, amendment, or consent under permitted assets (other than foreclosure property) held by the FASIT).

(3) Exception for income from certain dispositions

(A) In general

Paragraph (2)(B) shall not apply to a disposition which would not be a prohibited transaction (as defined in section 860F(a)(2)) by reason of—

(i) clause (ii), (iii), or (iv) of section 860F(a)(2)(A), or

(ii) section 860F(a)(5),

if the FASIT were treated as a REMIC and permitted assets (other than cash or cash equivalents) were treated as qualified mortgages.

(B) Substitution of debt instruments; reduction of over-collateralization

Paragraph (2)(B) shall not apply to—

(i) the substitution of a debt instrument described in subsection (c)(1)(B) for another debt instrument which is a permitted asset, or

(ii) the distribution of a debt instrument contributed by the holder of the ownership interest to such holder in order to reduce over-collateralization of the FASIT,

but only if a principal purpose of acquiring the debt instrument which is disposed of was not the recognition of gain (or the reduction of a loss) as a result of an increase in the market value of the debt instrument after its acquisition by the FASIT.

(C) Liquidation of class of regular interests

Paragraph (2)(B) shall not apply to the complete liquidation of any class of regular interests.

(D) Income from dispositions of former hedge assets

Paragraph (2)(A) shall not apply to income derived from the disposition of—

(i) an asset which was described in subsection (c)(1)(D) when first acquired by the FASIT but on the date of such disposition was no longer described in subsection (c)(1)(D)(ii), or

(ii) a contract right to acquire an asset described in clause (i).

(4) Net income

For purposes of this subsection, net income shall be determined in accordance with section 860F(a)(3).

(f) Coordination with other provisions

(1) Wash sales rules

Rules similar to the rules of section 860F(d) shall apply to the ownership interest in a FASIT.

(2) Section 475

Except as provided by the Secretary by regulations, if any security which is sold or contributed to a FASIT by the holder of the ownership interest in such FASIT was required to be marked-to-market under section 475 by such holder, section 475 shall continue to apply to such security; except that in applying section 475 while such security is held by the FASIT, the fair market value of such security for purposes of section 475 shall not be less than its value under section 860I(d).

(g) Related person

For purposes of this part, a person (hereinafter in this subsection referred to as the "related person") is related to any person if—

(1) the related person bears a relationship to such person specified in section 267(b) or section 707(b)(1), or

(2) the related person and such person are engaged in trades or businesses under common control (within the meaning of subsections (a) and (b) of section 52).

For purposes of paragraph (1), in applying section 267(b) or 707(b)(1), "20 percent" shall be substituted for "50 percent".

(h) Regulations

The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this part, including regulations to prevent the abuse of the purposes of this part through transactions which are not primarily related to securitization of debt instruments by a FASIT.

(Added Pub. L. 104–188, title I, §1621(a), Aug. 20, 1996, 110 Stat. 1862; amended Pub. L. 105–34, title XVI, §1601(f)(6), Aug. 5, 1997, 111 Stat. 1091.)

Amendments

1997—Subsec. (b)(1)(A). Pub. L. 105–34, §1601(f)(6)(A), substituted "on or after the startup date" for "after the startup date" in introductory provisions.

Subsec. (d)(2). Pub. L. 105–34, §1601(f)(6)(B), substituted "section 860I(b)(2)" for "section 860I(c)(2)".

Subsec. (e)(2)(A). Pub. L. 105–34, §1601(f)(6)(E)(ii), inserted "except as provided in paragraph (3)," before "the receipt".

Subsec. (e)(2)(B). Pub. L. 105–34, §1601(f)(6)(C), inserted "other than foreclosure property" after "any permitted asset".

Subsec. (e)(3)(A). Pub. L. 105–34, §1601(f)(6)(D), struck out "if the FASIT were treated as a REMIC and debt instruments described in subsection (c)(1)(B) were treated as qualified mortgages." after "section 860F(a)(5)," in cl. (ii) and inserted concluding provisions "if the FASIT were treated as a REMIC and permitted assets (other than cash or cash equivalents) were treated as qualified mortgages."

Subsec. (e)(3)(D). Pub. L. 105–34, §1601(f)(6)(E)(i), added subpar. (D).

Effective Date of 1997 Amendment

Amendment by Pub. L. 105–34 effective as if included in the provisions of the Small Business Job Protection Act of 1996, Pub. L. 104–188, to which it relates, see section 1601(j) of Pub. L. 105–34, set out as a note under section 23 of this title.

Section Referred to in Other Sections

This section is referred to in section 860K of this title.