[Federal Register Volume 59, Number 235 (Thursday, December 8, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30004]


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[Federal Register: December 8, 1994]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8571]
RIN 1545-AO57

 

Reporting Requirements for Recipients of Points Paid on 
Residential Mortgages

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations setting forth the 
information reporting requirements for recipients of prepaid interest 
in the form of points (points) paid on residential mortgages. The 
regulations implement amendments made by the Omnibus Budget 
Reconciliation Act of 1989. The regulations affect any taxpayer that, 
in the course of a trade or business, receives $600 or more of 
interest, including points, in a calendar year on a residential 
mortgage.

DATES: These regulations are effective December 8, 1994.
    These regulations are applicable for mortgage interest received 
after December 31, 1987. However, the reporting requirements of 
Sec. 1.6050H-1 of the regulations do not apply to prepaid interest in 
the form of points received before January 1, 1995.

FOR FURTHER INFORMATION CONTACT: James L. Atkinson, (202) 622- 4950 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in these final regulations 
have been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h)) 
under control number 1545-1380. The estimated annual burden per 
respondent/recordkeeper varies from two hours to thirty-five hours, 
depending on individual circumstances, with an estimated average of ten 
hours.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, 
Washington, DC 20224, and to the Office of Management and Budget, Attn: 
Desk Officer for the Department of the Treasury, Office of Information 
and Regulatory Affairs, Washington, DC 20503.

Background

    On December 31, 1992, the IRS published in the Federal Register a 
notice of proposed rulemaking (57 FR 62526) proposing amendments to the 
Income Tax Regulations (26 CFR part 1) under section 6050H of the 
Internal Revenue Code of 1986 (Code). These amendments were proposed to 
implement section 7646 of the Omnibus Budget Reconciliation Act of 
1989, Pub. L. 101-239, 103 Stat. 2106 (the 1989 Act).
    Written comments responding to the notice of proposed rulemaking 
were received. No public hearing was requested or held. After 
consideration of all the comments, the proposed regulations under 
section 6050H are adopted as revised by this Treasury decision. The 
comments made on the proposed regulations and the revisions 
incorporated in the final regulations are discussed below.

Explanation of Revisions and Summary of Comments in General

    Section 6050H provides that an information return must be made by 
any person who is engaged in a trade or business and who, in the course 
of that trade or business, receives from any individual $600 or more of 
interest on any mortgage in a calendar year. Any person required to 
make an information return under section 6050H also must furnish a 
statement to the payor of record on or before January 31 of the year 
following the calendar year in which the interest was received.
    Section 6050H(b)(2) was amended by the 1989 Act to require persons 
subject to the information reporting requirements of section 6050H to 
separately state the amount of points and the amount of interest (other 
than points) received from an individual on a mortgage during a 
calendar year. Section 6050H(d)(2) requires persons subject to the 
information reporting requirements to provide to the individual from 
whom the interest and points were received a statement separately 
stating the amount of points and the amount of interest (other than 
points) received on the mortgage during the calendar year.
    On April 12, 1988, the IRS issued final regulations (TD 8191, (53 
FR 12002)) regarding the application of section 6050H to amounts 
received as interest (other than points). The final regulations 
contained in this Treasury decision supplement the existing regulations 
by providing guidance as to the application of section 6050H to points 
received from an individual during a calendar year.
    On December 29, 1993, the IRS issued final regulations (TD 8507, 
(58 FR 68751)) regarding the application of section 6050H to 
reimbursements of interest paid in connection with a qualified 
mortgage. The final regulations contained in this Treasury decision 
preserve all substantive changes made to Sec. 1.6050H-2 by TD 8507, 
including changes made to the language of Sec. 1.6050H-2(a)(2)(iv) 
(renumbered as Sec. 1.6050H-2(a)(2)(v) by the final regulations). Apart 
from the renumbering of various provisions, the final regulations do 
not affect the language of the regulatory provisions adopted by TD 
8507. A complete discussion of TD 8507 may be found in the preamble to 
that Treasury decision.
    At the request of commentators, the IRS is considering the issuance 
of guidance providing uniform procedures for requesting extensions of 
time within which to file information returns with the IRS and related 
statements to taxpayers. This guidance, if issued, would apply to the 
information reporting requirements set forth in this Treasury decision.

Significant Provisions of and Changes Made by the Final Regulations

A. Definition of Points

    A number of commentators submitted suggestions regarding the proper 
definition of prepaid interest in the form of points. These suggestions 
and other significant provisions are summarized below.
1. Seller-Paid Points
    The final regulations require the reporting of points that are paid 
by the seller of a principal residence on behalf of the borrower (i.e., 
seller-paid points). For this purpose, seller-paid points are treated 
as paid by the seller to the payor of record and then paid directly by 
the payor of record to the interest recipient.
    One commentator suggested that seller-paid points should not be 
deductible by a borrower, and as a result, should not be reported by an 
interest recipient. Consistent with the provisions of Sec. 1.1273-
2(g)(4) (pertaining to original issue discount), however, the IRS 
published Rev. Proc. 94-27, 1994-1 C.B. 613, on April 11, 1994, 
permitting borrowers to treat seller-paid points as amounts that are 
deductible under section 461(g)(2) of the Code. In order to promote 
consistency with this treatment, the final regulations require the 
reporting of seller-paid points on Form 1098.
2. Loan Origination Fees
    The regulations apply equally to amounts designated as points 
payable in connection with any residential loan, regardless of whether 
the loan is a conventional loan, or is insured or guaranteed by the 
Federal Housing Administration (FHA) or the Department of Veterans 
Affairs (VA). Amounts paid in connection with either a VA or an FHA 
loan that would not be reportable if paid in connection with a 
conventional loan, however, continue to be nonreportable (for example, 
a VA funding fee).
3. Home Improvement Loans
    Commentators also suggested that the regulations be modified to 
reflect the statutory language of section 461(g)(2) of the Code, 
permitting a deduction for points paid in connection with indebtedness 
incurred for either the purchase or the improvement of the taxpayer's 
principal residence. The final regulations continue to exclude from the 
definition of reportable points amounts paid in respect of indebtedness 
incurred for the improvement of the taxpayer's principal residence. 
This limitation is designed to alleviate the need for lenders to 
ascertain that the disbursed funds actually are used for the 
improvement of the taxpayer's residence.
    The final regulations specifically provide that the regulations 
govern only the reporting of points under section 6050H of the Code, 
and do not affect the borrower's ability to deduct as points any amount 
that otherwise would be deductible under applicable authority. This 
provision clarifies that the deductibility of amounts such as points 
paid on home improvement loans are not affected by the exclusion of 
such amounts from the final regulations. These points are deductible 
under section 461(g)(2) provided that the taxpayer can establish by 
appropriate documentation that the points were paid for the improvement 
of the residence and that the requirements of section 163(h)(3) are 
otherwise satisfied.
4. Land Contracts
    One commentator requested clarification regarding application of 
the regulations to the refinancing of a land contract (or land sale 
contract, contract for deed, or similar forms of seller financing). In 
a land contract between two individuals, legal title to the property is 
not granted to the buyer until the land contract is paid in full.
    For tax purposes, the land contract generally constitutes a 
completed sale upon the transfer to the buyer of the benefits and 
burdens of ownership. Accordingly, subsequent indebtedness incurred to 
extinguish the outstanding balance of the amount due the seller 
constitutes a refinancing of the acquisition debt rather than the 
purchase of the residence. Accordingly, the final regulations have been 
revised to clarify that points paid in connection with the refinancing 
of land contracts and similar forms of seller-financed transactions 
must not be reported on Form 1098 because only points paid on the 
acquisition of the residence are reportable under the regulations.

B. Designation Agreement

    The proposed regulations permit an interest recipient to enter into 
a designation agreement with a qualified person, pursuant to which the 
qualified person will assume responsibility for fulfilling the 
reporting responsibilities of the interest recipient. In general, the 
proposed regulations provide that a qualified person is either (i) a 
trade or business with respect to which the interest recipient is under 
common control within the meaning of Sec. 1.414(c)-2, or (ii) a person 
who is named as the designee by the lender of record or by another 
qualified person in a designation agreement, and who either was 
involved in the original loan transaction or is a subsequent purchaser 
of the loan.
1. Qualified Person
    One commentator suggested that the definition of qualified person 
be expanded to include closing attorneys and settlement agents. The 
commentator suggested that closing attorneys and settlement agents are 
in the best position to determine the extent to which points should be 
reported on Form 1098.
    Neither closing attorneys nor settlement agents are suited to 
fulfill the continuing, annual reporting on Form 1098 of interest 
(other than points) paid on the mortgage. Because it is undesirable to 
separate the responsibility for reporting points from the 
responsibility for reporting interest (other than points), neither 
closing attorneys nor settlement agents have been added to the list of 
qualified persons.
    It also was suggested that the definition of qualified persons be 
clarified to include mortgage servicers. In many cases, the mortgage 
lender will assign responsibility for servicing the mortgage, including 
applicable reporting responsibility, to a mortgage servicer that is a 
subsidiary of either the lender or the lender's parent corporation. The 
final regulations retain the existing definition of a qualified person 
for purposes of reporting interest (other than points). Thus, to the 
extent mortgage servicing corporations presently are able to comply 
with the provisions governing the reporting of interest (other than 
points), these corporations likewise should be able to comply with 
those requirements with respect to the reporting of points.
2. Incorporation Into Section 6045
    One commentator suggested that the proposed regulations be amended 
to permit incorporation of the designation agreement into the 
designation agreement already permitted in the regulations under Code 
section 6045 on the sale or exchange of reportable real estate (see 
Sec. 1.6045-4(e)(5)). The commentator suggested that this consolidation 
would eliminate the need for two separate designation agreements for a 
single mortgage loan closing.
    After careful consideration, the IRS has rejected this suggestion. 
The reporting provisions of the two sections serve different purposes 
and involve the collection of different types of information. (Compare 
Sec. 1.6045-4(h)(1) with Sec. 1.6050H-2(a)(2).) Moreover, the parties 
that are required to report under section 6045 and section 6050H, even 
with respect to the same transaction, generally are not identical. 
Thus, in most cases, each reporting person would be required to execute 
separate designation agreements. As a result of the fundamental 
incompatibility of the two reporting provisions, the final regulations 
retain the definition of qualified person contained in the proposed 
regulations.

C. Construction Loans

    The regulations also provide guidance regarding the reporting of 
points paid on a loan incurred for the construction of a principal 
residence. Under the regulations, a loan incurred for the construction 
of a principal residence, as well as a permanent (i.e., take-out) loan 
incurred to refinance the construction loan, are each considered 
indebtedness incurred in connection with the purchase of a principal 
residence. Because no comments were received regarding the treatment of 
construction loans, the final regulations adopt the language of the 
proposed regulations without change.

D. $600 Reporting Threshold

    The current reporting regulations require an interest recipient 
that receives at least $600 of interest on a qualified mortgage for a 
calendar year to comply with the reporting requirements of the 
regulations. The proposed regulations clarify that for purposes of 
determining whether this $600 reporting threshold has been met, 
interest includes prepaid interest in the form of points. Commentators 
suggested that the computation required by this provision would be 
administratively burdensome for lenders of record.
    The Service believes that the additional burden that this 
computation will place on lenders will be minimal, while the benefits 
to borrowers will be tangible. Accordingly, the final regulations adopt 
the language of the proposed regulations without change.

E. Effective Date

    The proposed regulations indicate that the reporting requirements 
set forth therein are to be effective for prepaid interest in the form 
of points received after December 31, 1993. These final regulations 
modify this effective date to provide that the reporting requirements 
with respect to points are not effective for points paid before January 
1, 1995. For guidance on the application of section 6050H to points 
received after 1990 and before 1995, see Notice 90-70, 1990-2 C.B. 351; 
Rev. Proc. 92-11, 1992-1 C.B. 662; Rev. Rul. 92-2, 1992-1 C.B. 360; and 
Rev. Proc. 94-27, 1994-1 C.B. 613.

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, 
the notice of proposed rulemaking preceding these regulations was 
submitted to the Small Business Administration for comment on its 
impact on small business.

    Drafting Information: The principal author of these regulations 
is James L. Atkinson, Office of Assistant Chief Counsel (Income Tax 
and Accounting), IRS. However, other personnel from the IRS and 
Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended in part 
by adding a new section authority to read as follows:

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

    Section 1.6050H-1 also issued under 26 U.S.C. 6050H. * * *
    Par. 2. Section 1.6050H-0 is revised to read as follows:


Sec. 1.6050H-0  Table of contents.

    This section lists the major captions that appear in Secs. 1.6050H-
1 and 1.6050H-2.


Sec. 1.6050H-1  Information reporting of mortgage interest received in 
a trade or business from an individual.

    (a) Information reporting requirement.
    (1) Overview.
    (2) Reporting requirement.
    (3) Optional reporting.
    (b) Qualified mortgage.
    (1) In general.
    (2) Mortgage.
    (i) In general.
    (ii) Transitional rule for certain obligations existing on 
December 31, 1984.
    (iii) Transitional rule for certain obligations existing on 
December 31, 1987.
    (3) Payor of record.
    (4) Lender of record.
    (c) Interest recipient.
    (1) Trade or business requirement.
    (2) Interest received or collected on behalf of another person.
    (i) General rule.
    (ii) Exception.
    (3) Interest received in the form of points.
    (i) In general.
    (ii) If designation agreement is in effect.
    (4) Governmental unit.
    (5) Examples.
    (d) Additional rules.
    (1) Reporting by foreign person.
    (2) Reporting with respect to nonresident alien individual.
    (i) In general.
    (ii) Nonresident alien individual status.
    (3) Reporting by cooperative housing corporations.
    (e) Amount of interest received on mortgage for calendar year.
    (1) In general.
    (2) Calendar year.
    (i) In general.
    (ii) De minimis rule.
    (iii) Applicability to points.
    (3) Certain interest not received on mortgage.
    (i) Interest received from seller on payor of record's mortgage.
    (ii) Interest received from governmental unit.
    (4) Interest calculated under Rule of 78s method of accounting.
    (f) Points treated as interest.
    (1) General rule.
    (2) Limitations.
    (3) Special rule.
    (i) Amounts paid directly by payor of record.
    (ii) Examples.
    (4) Construction loans.
    (i) In general.
    (ii) Limitation on refinancing of construction loans.
    (5) Amounts paid to mortgage brokers.
    (6) Effect on deduction of points.
    (g) Effective date.
    (1) In general.
    (2) Points.


Sec. 1.6050H-2  Time, form, and manner of reporting interest received 
on qualified mortgage.

    (a) Requirement to file return.
    (1) Form of return.
    (2) Information included on return.
    (3) Reimbursements of interest on a qualified mortgage.
    (4) Time and place for filing return.
    (5) Use of magnetic media.
    (b) Requirement to furnish statement.
    (1) In general.
    (2) Information included on statement.
    (3) Statement furnished pursuant to Federal mortgage program.
    (4) Copy of Form 1098 to payor of record.
    (5) Furnishing statement with other information reports.
    (6) Time and place for furnishing statement.
    (c) Notice requirement for use of Rule of 78s method of 
accounting.
    (1) In general.
    (2) Time and manner.
    (d) Reporting under designation agreement.
    (1) In general.
    (2) Qualified person.
    (3) Designation agreement.
    (4) Penalties.
    (e) Penalty provisions.
    (1) Returns and statements the due date for which (determined 
without regard for extensions) is after December 31, 1987, and 
before December 31, 1989.
    (i) Failure to file return or to furnish statement.
    (ii) Failure to furnish TIN.
    (iii) Failure to include correct information.
    (2) Returns and statements the due date for which (determined 
without regard for extensions) is after December 31, 1989.
    (i) Failure to file return or to furnish statement.
    (ii) Failure to furnish TIN.
    (iii) Failure to include correct information.
    (f) Requirement to request and to obtain TIN.
    (1) In general.
    (2) Manner of requesting TIN.
    (g) Effective date.
    (1) In general.
    (2) Points.

    Par. 3. Section 1.6050H-1 is amended as follows:
    1. Paragraph (a) is revised.
    2. Paragraph (b)(4) is added.
    3. Paragraph (c) is amended as follows:
    a. Paragraphs (c) (1) and (2) are revised.
    b. Paragraph (c)(3) is redesignated as paragraph (c)(5) and Example 
(5) is added.
    c. New paragraph (c)(3) is added.
    4. Paragraph (e) is amended as follows:
    a. Paragraphs (e)(1) and (e)(2)(i) are revised.
    b. Paragraph (e)(2)(iii) is added.
    5. Paragraph (f) is added.
    6. Paragraph (g) is revised.
    The added and revised provisions read as follows:


Sec. 1.6050H-1  Information reporting of mortgage interest received in 
a trade or business from an individual.

    (a) Information reporting requirement--(1) Overview. The 
information reporting requirements of section 6050H, this section, and 
Sec. 1.6050H-2 apply to an interest recipient who receives at least 
$600 of interest on a qualified mortgage for a calendar year or who 
makes a reimbursement of interest described in Sec. 1.6050H-
2(a)(2)(iv). Paragraph (b) of this section defines qualified mortgage. 
Paragraph (c) of this section defines interest recipient. Paragraph (d) 
of this section contains additional rules relating to the reporting 
requirement for foreign persons, cooperative housing corporations, and 
nonresident alien individuals. Paragraph (e) of this section contains 
rules for determining the amount of interest received on a mortgage for 
a calendar year. Paragraph (f) of this section provides rules for 
determining when prepaid interest in the form of points is taken into 
account as interest for purposes of section 6050H, this section, and 
Sec. 1.6050H-2.
    (2) Reporting requirement. Except as otherwise provided in this 
section and Sec. 1.6050H-2, an interest recipient that either receives 
at least $600 of interest on a qualified mortgage for a calendar year 
or makes reimbursements of interest described in Sec. 1.6050H-
2(a)(2)(iv) must, with respect to that interest--
    (i) File an information return with the Internal Revenue Service; 
and
    (ii) Furnish a statement to the payor of record on the mortgage.
    (3) Optional reporting. An interest recipient may, but is not 
required to, report its receipt of less than $600 of interest on a 
qualified mortgage for a calendar year. Similarly, an interest 
recipient also may report reimbursements of interest on a qualified 
mortgage even if the reimbursements are not required to be reported by 
Sec. 1.6050H-2(a)(2)(iv). An interest recipient that chooses, but is 
not required, to file a return as provided in this section and 
Sec. 1.6050H-2(a) or to furnish a statement as provided in this section 
and Sec. 1.6050H-2(b) is subject to the requirements of this section 
and Sec. 1.6050H-2.
    (b) * * *
    (4) Lender of record. The lender of record is the person who, at 
the time the loan is made, is named as the lender on the loan documents 
and whose right to receive payment from the payor of record is secured 
by the payor of record's principal residence. An intention by the 
lender of record to sell or otherwise transfer the loan to a third 
party subsequent to the close of the transaction will not affect the 
determination of who is the lender of record.
    (c) Interest recipient--(1) Trade or business requirement. Except 
as provided in paragraph (c)(4) of this section, an interest recipient 
is a person that is engaged in a trade or business (whether or not the 
trade or business of lending money) and that, in the course of the 
trade or business, either receives interest on a mortgage or makes a 
reimbursement of interest on a qualified mortgage described in 
Sec. 1.6050H-2(a)(3). For purposes of this paragraph (c)(1), if a 
person holds a mortgage which was originated or acquired in the course 
of a trade or business, the interest on the mortgage is considered to 
be received in the course of that trade or business. For example, if 
real estate developer A lends money to individual B to enable B to 
purchase a house in a subdivision owned and developed by A, and B gives 
a mortgage to A for the loan, A is an interest recipient for interest 
received on the mortgage. Alternatively, if C, a person engaged in the 
trade or business of being a physician, lends money to individual D to 
enable D to purchase C's home, and D gives a mortgage to C for the 
loan, C is not an interest recipient for interest received on the 
mortgage, because C will not receive the interest in the course of the 
trade or business of being a physician.
    (2) Interest received or collected on behalf of another person--(i) 
General rule. Except as otherwise provided in paragraph (c)(2)(ii) or 
(3) of this section, a person that, in the course of its trade or 
business, receives or collects interest on a mortgage on behalf of 
another person (e.g., the lender of record) is the interest recipient 
(the initial recipient) for the mortgage. In this case, the reporting 
requirement of paragraph (a) of this section does not apply to the 
transfer of interest from the initial recipient to the person for which 
the initial recipient receives or collects the interest. For example, 
if financial institution A collects interest on behalf of financial 
institution B, A is the initial recipient for the mortgage and is 
subject to the reporting requirements of section 6050H, and B is not 
required to report the interest received on the mortgage from A.
    (ii) Exception--(A) Scope of exception. Paragraph (c)(2)(i) of this 
section does not apply for any period for which--
    (1) An initial recipient does not possess the information needed to 
comply with the reporting requirement of paragraph (a) of this section; 
and
    (2) The person for which the interest is received or collected 
would receive the interest in the course of its trade or business if 
the interest were paid directly to that person. For purposes of this 
paragraph (c)(2)(ii)(A)(2), if interest is received or collected on 
behalf of a person other than an individual, that person is presumed to 
receive interest in a trade or business.
    (B) Application of exception. If the exception provided by this 
paragraph (c)(2)(ii) applies, the person for which the interest is 
received or collected is the interest recipient with respect to 
interest received or collected on the mortgage during the period 
described in this paragraph (c)(2)(ii).
    (3) Interest received in the form of points. For purposes of this 
section and Sec. 1.6050H-2, in the case of prepaid interest received in 
the form of points (as defined in paragraph (f) of this section):
    (i) In general. Except as provided in paragraph (c)(3)(ii) of this 
section, only the lender of record or a qualified person (as defined in 
Sec. 1.6050H-2(d)(2)) is treated as receiving the points. The lender of 
record or qualified person is treated as receiving all points paid 
directly by the payor of record in connection with the purchase of the 
principal residence.
    (ii) If designation agreement is in effect. If a designation 
agreement is executed pursuant to Sec. 1.6050H-2(d) with respect to 
points, only the designated party under the agreement is treated as 
receiving points with respect to any mortgage to which the agreement 
applies. The designated party is treated as receiving all points with 
respect to any mortgage to which the agreement applies.
* * * * *
    (5) * * *

    Example (5). On December 1, Borrower obtains from Lender funds 
with which to purchase an existing structure to be used as 
Borrower's principal residence. In connection with the mortgage, 
Lender charges Borrower $300 as points. Borrower pays this amount to 
Lender at closing using unborrowed funds. In addition, Lender 
receives from Borrower with respect to the mortgage $300 as interest 
(as determined under paragraph (e) of this section) other than 
points. Because Lender has received at least $600 in interest, 
including points, with respect to Borrower's mortgage during the 
calendar year, Lender must report the payments in accordance with 
paragraph (a) of this section and Sec. 1.6050H-2. Under those 
sections, Lender must separately state on the information return and 
the statement to Borrower the $300 received as interest (other than 
points) and the $300 received as points.
* * * * *
    (e) Amount of interest received on mortgage for calendar year--(1) 
In general. For purposes of this section and Sec. 1.6050H-2, interest 
includes mortgage prepayment penalties and late charges other than late 
charges for a specific mortgage service. Interest also includes prepaid 
interest in the form of points (as defined in paragraph (f) of this 
section). Whether an interest recipient receives $600 or more of 
interest on a mortgage for a calendar year is determined on a mortgage-
by-mortgage basis. An interest recipient need not aggregate interest 
received on all of the mortgages of a payor of record held by the 
interest recipient to determine whether the $600 threshold is met. 
Therefore, an interest recipient need not report interest of less than 
$600 received on a mortgage, even though it receives a total of $600 or 
more of interest on all of the mortgages of the payor of record for a 
calendar year.
    (2) Calendar year--(i) In general. Except as otherwise provided in 
paragraph (e)(2)(ii) or (iii) of this section, the calendar year for 
which interest is received is the later of the calendar year in which 
the interest is received or the calendar year in which the interest 
properly accrues.
    (ii) * * *
    (iii) Applicability to points. Paragraphs (e)(2)(i) and (ii) of 
this section do not apply to prepaid interest in the form of points (as 
defined in paragraph (f) of this section). Points (as defined in 
paragraph (f) of this section) must be reported in the calendar year in 
which they are received.
* * * * *
    (f) Points treated as interest--(1) General rule. Subject to the 
limitations of paragraph (f)(2) of this section, an amount is deemed to 
be points paid in respect of indebtedness incurred in connection with 
the purchase of the payor of record's principal residence (points) for 
purposes of this section and Sec. 1.6050H-2 to the extent that the 
amount--
    (i) Is clearly designated on the Uniform Settlement Statement 
prescribed under the Real Estate Settlement Procedures Act of 1974, 12 
U.S.C. 2601 et seq., (e.g., the Form HUD-1) as points incurred in 
connection with the indebtedness, for example as loan origination fees 
(including amounts so designated on Veterans Affairs (VA) and Federal 
Housing Administration (FHA) loans), loan discount, discount points, or 
points;
    (ii) Is computed as a percentage of the stated principal amount of 
the indebtedness incurred by the payor of record;
    (iii) Conforms to an established practice of charging points in the 
area in which the loan is issued and does not exceed the amount 
generally charged in the area;
    (iv) Is paid in connection with the acquisition by the payor of 
record of a residence that is the principal residence of the payor of 
record and that secures the loan. For this purpose, the lender of 
record may rely on a signed written statement of the payor of record 
that states whether the proceeds of the loan are for the purchase of 
the mortgagor's principal residence; and
    (v) Is paid directly by the payor of record.
    (2) Limitations. An amount is not points for purposes of this 
section to the extent that the amount is--
    (i) Paid in connection with indebtedness incurred for the 
improvement of a principal residence;
    (ii) Paid in connection with indebtedness incurred to purchase or 
improve a residence that is not the payor of record's principal 
residence, such as a second home, vacation property, investment 
property, or trade or business property;
    (iii) Paid in connection with a home equity loan or a line of 
credit, even though the loan is secured by the payor of record's 
principal residence;
    (iv) Paid in connection with a refinancing loan (except as provided 
by paragraph (f)(4) of this section), including a loan incurred to 
refinance indebtedness owed by the borrower under the terms of a land 
contract, a contract for deed, or similar forms of seller financing;
    (v) Paid in lieu of amounts that ordinarily are stated separately 
on the Form HUD-1, such as appraisal fees, inspection fees, title fees, 
attorney fees, and property taxes; or
    (vi) Paid in connection with the acquisition of a principal 
residence, to the extent that the amount is allocable to indebtedness 
in excess of the aggregate amount that may be treated as acquisition 
indebtedness under section 163(h)(3)(B)(ii).
    (3) Special rule--(i) Amounts paid directly by payor of record. For 
purposes of this section, an amount is considered paid directly by the 
payor of record if it is--
    (A) Provided by the payor of record from funds that have not been 
borrowed from the lender of record for this purpose as part of the 
overall transaction. The amount provided may include amounts designated 
as down payments, escrow deposits, earnest money applied at the 
closing, and other funds actually paid over by the payor of record at 
or before the time of closing; or
    (B) Paid as points (within the meaning of this paragraph (f)) on 
behalf of the payor of record by the seller. For this purpose, an 
amount paid as points to an interest recipient by the seller on behalf 
of the payor of record is treated as paid to the payor of record and 
then paid directly by the payor of record to the interest recipient.
    (ii) Examples. The provisions of this paragraph (f) are illustrated 
by the following examples:

    Example 1. Financed payment of points. Buyer purchases a 
principal residence for $100,000. There is a total of $7,000 in 
closing costs (exclusive of down payment) charged in connection with 
the sale. Of this amount, $3,000 is charged as points (within the 
meaning of paragraph (f) of this section). At closing, Buyer makes a 
down payment of $20,000 and provides unborrowed funds in the amount 
of $4,000 for the payment of various closing costs other than 
points. Buyer finances payment of the points by increasing the 
principal amount of the loan by $3,000. Seller makes no payments on 
Buyer's behalf. Because Buyer has provided at closing funds that 
have not been borrowed from the lender of record for this purpose in 
an amount at least equal to the amount charged as points in the 
transaction, the lender of record (or a qualified person) must 
report $3,000 as points in accordance with this section and 
Sec. 1.6050H-2.
    Example 2. Seller-paid points. Buyer purchases a principal 
residence for $100,000. There is a total of $7,000 in closing costs 
(exclusive of down payment) charged in connection with the sale. Of 
this amount, $3,000 is charged as points (within the meaning of this 
paragraph (f)). Seller agrees to pay all closing costs on behalf of 
Buyer, including the amount charged as points. Accordingly, the 
amount paid by Seller as points is treated as paid directly by 
Buyer, and the lender of record (or a qualified person) must report 
the $3,000 as points in accordance with this section and 
Sec. 1.6050H-2.

    (4) Construction loans--(i) In general. An amount paid in 
connection with indebtedness incurred to construct a residence, or to 
refinance indebtedness incurred to construct a residence, is deemed to 
be points for purposes of this section to the extent the amount--
    (A) Is clearly designated on the loan documents as points incurred 
in connection with the indebtedness, for example, as loan origination 
fees, loan discount, discount points, or points;
    (B) Is computed as a percentage of the stated principal amount of 
the indebtedness incurred by the payor of record;
    (C) Conforms to an established practice of charging points in the 
area in which the loan is issued and does not exceed the amount 
generally charged in the area;
    (D) Is paid in connection with indebtedness incurred by the payor 
of record to construct (or to refinance construction of) a residence 
that is to be used, when completed, as the principal residence of the 
payor of record;
    (E) Is paid directly by the payor of record; and
    (F) Is not allocable to indebtedness in excess of the aggregate 
amount that may be treated as acquisition indebtedness under section 
163(h)(3)(B)(ii).
    (ii) Limitation on refinancing of construction loans. Amounts paid 
in connection with refinancing indebtedness incurred to construct a 
residence are not treated as points to the extent they are allocable to 
indebtedness that exceeds the indebtedness incurred to construct the 
residence.
    (5) Amounts paid to mortgage brokers. Amounts received directly or 
indirectly by a mortgage broker are treated as points under this 
paragraph (f) to the same extent the amounts would be so treated if 
they were paid to and retained by the lender of record, and must be 
reported by the lender of record in accordance with this section and 
Sec. 1.6050H-2.
    (6) Effect on deduction of points. This section and Sec. 1.6050H-2 
address only the information reporting requirements of section 6050H 
and do not affect a payor of record's deduction for any amount in 
accordance with applicable provisions of the Internal Revenue Code.
    (g) Effective date--(1) In general. Except as provided in paragraph 
(g)(2) of this section, this section is effective for mortgage interest 
received after December 31, 1987. Section 1.6050H-1T contains rules for 
reporting mortgage interest received after December 31, 1984, and 
before January 1, 1988.
    (2) Points. The reporting requirements of this section do not apply 
to prepaid interest received in the form of points before January 1, 
1995. In addition, the inclusion of points in the determination of 
interest under paragraph (e)(1) of this section applies only to 
transactions occurring after December 31, 1994.
    Par. 4. Section 1.6050H-2 is amended as follows:
    1. Paragraph (a) is amended as follows:
    a. Paragraph (a)(2)(iii) is revised.
    b. In paragraph (a)(2)(iv)(B) the word ``and'' at the end of the 
paragraph is removed.
    c. Paragraph (a)(2)(v) is redesignated as paragraph (a)(2)(vi).
    d. New paragraph (a)(2)(v) is added.
    2. Paragraph (d) is revised.
    3. Paragraph (e) is amended as follows:
    a. Paragraph (e)(1) is revised.
    b. Paragraph (e)(1)(i) is added.
    4. Paragraphs (e)(2) and (3) are redesignated as paragraphs 
(e)(1)(ii) and (iii), respectively.
    5. New paragraph (e)(2) is added.
    6. Paragraph (g) is revised.
    The additions and revisions read as follows:


Sec. 1.6050H-2  Time, form, and manner of reporting interest received 
on qualified mortgage.

    (a) * * *
    (2) * * *
    (iii) The amount of interest (other than points) required to be 
reported with respect to the qualified mortgage for the calendar year;
* * * * *
    (v) The amount of points paid directly by the payor of record 
(within the meaning of Sec. 1.6050H-1(f)(3)) required to be reported 
with respect to the qualified mortgage for the calendar year; and
* * * * *
    (d) Reporting under designation agreement--(1) In general. An 
interest recipient that receives or collects interest (including 
points) on a mortgage may designate a qualified person to satisfy the 
reporting requirements of paragraphs (a), (b), and (c) of this section. 
If a designated qualified person reports as permitted under this 
paragraph (d), it will satisfy the requirement of paragraph (a)(2)(ii) 
of this section by including on Form 1098 (and Form 1096) the name, 
address, and TIN of the designated qualified person.
    (2) Qualified person. A qualified person is either--
    (i) A trade or business with respect to which the interest 
recipient is under common control within the meaning of Sec. 1.414(c)-
2; or
    (ii) A person who is named as the designee by the lender of record 
or by a qualified person (under paragraph (d)(2) of this section) in a 
designation agreement entered into in accordance with paragraph (d)(3) 
of this section, and who either was involved in the original loan 
transaction or is a subsequent purchaser of the loan.
    (3) Designation agreement. An interest recipient that designates a 
qualified person to satisfy the reporting requirements described in 
paragraphs (a), (b), and (c) of this section must make that designation 
in a written designation agreement. The designation agreement must 
identify the mortgage(s) and calendar years for which the designated 
qualified person must report, and must be signed by both the designator 
and designee. A designee may report an amount as having been paid 
directly by the payor of record (for purposes of paragraph (a)(2)(v) of 
this section) only if the designation agreement contains the 
designator's representation that it did not lend such amount to the 
payor of record as part of the overall transaction. The designator must 
retain a copy of the designation agreement for four years following the 
close of the calendar year in which the loan is made. The designation 
agreement need not be filed with the Internal Revenue Service.
    (4) Penalties. A designated qualified person is subject to any 
applicable penalties provided in part II of subchapter B of chapter 68 
of the Internal Revenue Code as if it were an interest recipient. A 
designator is relieved from liability for applicable penalties by 
designating a qualified person under the provisions of paragraph (d)(3) 
of this section. Paragraph (e) of this section describes applicable 
penalties.
    (e) Penalty provisions--(1) Returns and statements the due date for 
which (determined without regard for extensions) is after December 31, 
1987, and before December 31, 1989. For purposes of this paragraph 
(e)(1) only, all references to sections of the Internal Revenue Code 
refer to sections of the Internal Revenue Code of 1986, as amended on 
or before December 31, 1987.
    (i) Failure to file return or to furnish statement. The section 
6721 penalty applies to an interest recipient that fails to file a 
return required by paragraph (a) of this section with respect to a 
payor of record. The section 6722 penalty applies to an interest 
recipient that fails to furnish a statement required by paragraph (b) 
of this section to a payor of record.
* * * * *
    (2) Returns and statements the due date for which (determined 
without regard for extensions) is after December 31, 1989--(i) Failure 
to file return or to furnish statement. The section 6721 penalty 
applies to an interest recipient that fails to file a return required 
by paragraph (a) of this section with respect to a payor of record. The 
section 6722 penalty applies to an interest recipient that fails to 
furnish a statement required by paragraph (b) of this section to a 
payor of record.
    (ii) Failure to furnish TIN. The section 6721 penalty may apply to 
an interest recipient that fails to furnish the TIN of a payor of 
record on a return required by paragraph (a) of this section. The 
section 6721 penalty may apply to an interest recipient that fails to 
request and to obtain the TIN of a payor of record under paragraph (f) 
of this section.
    (iii) Failure to include correct information. The section 6721 
penalty may apply to an interest recipient that fails to include 
correct information on a return required by paragraph (a) of this 
section. The section 6722 penalty may apply to an interest recipient 
that fails to include correct information on a statement required by 
paragraph (b) of this section to be furnished to a payor record.
* * * * *
    (g) Effective date--(1) In general. Except as provided in paragraph 
(g)(2) of this section, this section is effective for mortgage interest 
received after December 31, 1987. Section 1.6050H-1T contains rules for 
reporting mortgage interest received after December 31, 1984, and 
before January 1, 1988.
    (2) Points. The reporting requirement of this section does not 
apply to prepaid interest in the form of points received before January 
1, 1995.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 5. The authority for part 602 continues to read as follows:

    Authority: 26 U.S.C. 7805.

    Par. 6. Section 602.101, the table in paragraph (c) is amended by 
revising the entries for Secs. 1.6050H-1 and 1.6050H-2 to read as 
follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (c) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
                                                                        
                                  *****                                 
1.6050H-1..................................................    1545-0901
                                                               1545-1380
1.6050H-2..................................................    1545-0901
                                                               1545-1339
                                                               1545-1380
                                                                        
                                  *****                                 
------------------------------------------------------------------------

Margaret Milner Richardson,
Commissioner of Internal Revenue.
    Approved: November 1, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-30004 Filed 12-7-94; 8:45 am]
BILLING CODE 4830-01-U