[Federal Register Volume 73, Number 135 (Monday, July 14, 2008)]
[Rules and Regulations]
[Pages 40171-40173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-15940]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9415]
RIN 1545-BB84


REMIC Residual Interests--Accounting for REMIC Net Income 
(Including Any Excess Inclusions) (Foreign Holders)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations relating to income 
that is associated with a residual interest in a Real Estate Mortgage 
Investment Conduit (REMIC) and that is allocated through certain 
entities to foreign persons who have invested in those entities. The 
foreign persons covered by these regulations include partners in 
domestic partnerships, shareholders of real estate investment trusts, 
shareholders of regulated investment companies, participants in common 
trust funds, and patrons of subchapter T cooperatives. These 
regulations are necessary to prevent inappropriate avoidance of current 
income tax liability by foreign persons to whom income from REMIC 
residual interests is allocated.

DATES: Effective Date: These regulations are effective on July 14, 
2008.
    Dates of Applicability: For dates of applicability, see Sec. Sec.  
1.860A-1(b)(5), 1.863-1(f) and 1.1441-2(f).

FOR FURTHER INFORMATION CONTACT: Arturo Estrada, (202) 622-3900 (not a 
toll-free number).

Background

    This document contains amendments to 26 CFR part 1 under sections 
860A, 860G(b), 863, 1441, and 1442 of the Internal Revenue Code (Code). 
On August 1, 2006, temporary regulations (TD 9272) were published in 
the Federal Register (71 FR 43363). A notice of proposed rulemaking 
(REG-159929-02) cross-referencing the temporary regulations was 
published in the Federal Register for the same day (71 FR 43398). The 
preamble to the temporary regulations contains an explanation of these 
provisions. No comments were received from the public in response to 
the notice of proposed rule making. Accordingly, this Treasury Decision 
adopts the proposed regulations without any substantive changes. No 
public hearing was requested or held.

Dates of Applicability

    The regulations regarding the timing of REMIC income inclusions 
apply to REMIC net income of a foreign person with respect to REMIC 
residual interests with respect to which the first REMIC net income 
allocation to the foreign person under section 860C occurs on or after 
August 1, 2006. The regulations regarding the source of excess 
inclusions are applicable for taxable years ending after August 1, 
2006.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) and (d) of the Administrative Procedure 
Act (5 U.S.C. chapter 5) does not apply to this regulation.
    Pursuant to section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. 605(b), it has also been determined that the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply to these 
regulations because these regulations do not have a significant 
economic impact on a substantial number of small entities. According to 
the Small Business Administration definition of a ``small business,'' 
13 CFR 121.201, a REMIC is classified as an ``Other Financial 
Vehicle,'' NAICS code 525990, and is considered a small entity if it 
accumulates less than 6.5 million dollars in annual receipts. It has 
been determined that REMICs affected by these regulations generally 
will have greater than 6.5 million dollars in annual receipts and 
therefore will not generally be classified as small business entities. 
Pursuant to section 7805(f) of the Internal Revenue Code, the notice of 
proposed rulemaking preceding this regulation was submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Dale Collinson, 
formerly with the Office of the Associate Chief Counsel (Financial 
Institutions and Products). 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

0
Accordingly, 26 CFR part 1 is amended as follows:

[[Page 40172]]

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by removing 
the entries for Sec. Sec.  860A-1T and 860G-3T to read as follows:

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


0
Par. 2. Section 1.860A-0 is amended by adding entries for Sec. Sec.  
1.860A-1(b)(5) and 1.860G-3(b) and removing the entries for Sec. Sec.  
1.860A-1T and 1.860G-3T to read as follows:


Sec.  1.860A-0  Outline of REMIC provisions.

* * * * *
Sec.  1.860A-1 Effective dates and transition rules.
* * * * *
    (b) * * *
    (5) Accounting for REMIC net income of foreign persons.
* * * * *
Sec.  1.860G-3 Treatment of foreign persons.
* * * * *
    (b) Accounting for REMIC net income
    (1) Allocation of partnership income to a foreign partner.
    (2) Excess inclusion income allocated by certain pass-through 
entities to a foreign person.

0
Par. 3. Section 1.860A-1(b)(5) is revised to read as follows:


Sec.  1.860A-1  Effective dates and transition rules.

* * * * *
    (b) * * *
    (5) Accounting for REMIC net income of foreign persons. Section 
1.860G-3(b) is applicable to REMIC net income (including excess 
inclusions) of a foreign person with respect to a REMIC residual 
interest if the first net income allocation under section 860C(a)(1) to 
the foreign person with respect to that interest occurs on or after 
August 1, 2006.


Sec.  1.860A-1T  [Removed]

0
Par. 4. Section 1.860A-1T is removed.

0
Par. 5. Section 1.860G-3 (b) is revised to read as follows:


Sec.  1.860G-3  Treatment of foreign persons.

* * * * *
    (b) Accounting for REMIC net income--(1) Allocation of partnership 
income to a foreign partner. A domestic partnership shall separately 
state its allocable share of REMIC taxable income or net loss in 
accordance with Sec.  1.702-1(a)(8). If a domestic partnership 
allocates all or some portion of its allocable share of REMIC taxable 
income to a partner that is a foreign person, the amount allocated to 
the foreign partner shall be taken into account by the foreign partner 
for purposes of sections 871(a), 881, 1441, and 1442 as if that amount 
was received on the last day of the partnership's taxable year, except 
to the extent that some or all of the amount is required to be taken 
into account by the foreign partner at an earlier time under section 
860G(b) as a result of a distribution by the partnership to the foreign 
partner or a disposition of the foreign partner's indirect interest in 
the REMIC residual interest. A disposition in whole or in part of the 
foreign partner's indirect interest in the REMIC residual interest may 
occur as a result of a termination of the REMIC, a disposition of the 
partnership's residual interest in the REMIC, a disposition of the 
foreign partner's interest in the partnership, or any other reduction 
in the foreign partner's allocable share of the portion of the REMIC 
net income or deduction allocated to the partnership. See Sec.  1.871-
14(d)(2) for the treatment of interest received on a regular or 
residual interest in a REMIC. For a partnership's withholding 
obligations with respect to excess inclusion amounts described in this 
paragraph (b)(1), see Sec. Sec.  1.1441-2(b)(5), 1.1441-2(d)(4), 
1.1441-5(b)(2)(i)(A), and Sec. Sec.  1.1446-1 through 1.1446-7.
    (2) Excess inclusion income allocated by certain pass-through 
entities to a foreign person. If an amount is allocated under section 
860E(d)(1) to a foreign person that is a shareholder of a real estate 
investment trust or a regulated investment company, a participant in a 
common trust fund, or a patron of an organization to which part I of 
subchapter T applies and if the amount so allocated is governed by 
section 860E(d)(2) (treating it ``as an excess inclusion with respect 
to a residual interest held by'' the taxpayer), the amount shall be 
taken into account for purposes of sections 871(a), 881, 1441, and 1442 
at the same time as the time prescribed for other income of the 
shareholder, participant, or patron from the trust, company, fund, or 
organization.


Sec.  1.860G-3T  [Removed]

0
Par. 6. Section 1.860G-3T is removed.

0
Par. 7. Section 1.863-0 is amended by adding an entry for 1.863-1(f) 
and removing the entries for Sec.  1.863-1T to read as follows:


Sec.  1.863-1  Allocation of gross income under section 863(a).

* * * * *
    (f) Effective/applicability date.

0
Par. 8. Section 1.863-1 paragraphs (e)(2) and (f) are revised to read 
as follows:


Sec.  1.863-1  Allocation of gross income under section 863(a).

* * * * *
    (e) * * *
    (1) * * *
    (2) Excess inclusion income and net losses. An excess inclusion (as 
defined in section 860E(c)) shall be treated as income from sources 
within the United States. To the extent of excess inclusion income 
previously taken into account with respect to a residual interest 
(reduced by net losses previously taken into account under this 
paragraph), a net loss (described in section 860C(b)(2)) with respect 
to the residual interest shall be allocated to the class of gross 
income and apportioned to the statutory grouping(s) or residual 
grouping of gross income to which the excess inclusion income was 
assigned.
    (f) Effective/applicability date. Paragraph (e)(2) of this section 
applies for taxable years ending after August 1, 2006.


Sec.  1.863-1T  [Removed]

0
Par. 9. Section 1.863-1T is removed.
0
Par. 10. Section 1.1441-0 is amended by revising the entry for Sec.  
1.1441-2(f) and removing the entries for Sec.  1.1441-2T to read as 
follows:


Sec.  1.1441-0  Outline of regulation provisions for section 1441.

* * * * *


Sec.  1.1441-2  Amounts subject to withholding.

* * * * *
    (f) Effective/applicability date.

0
Par. 11. Section 1.1441-2(b)(5), (d)(4) and (f) are revised to read as 
follows:


Sec.  1.1441-2  Amounts subject to withholding.

* * * * *
    (b) * * *
    (5) REMIC residual interests. Amounts subject to withholding 
include an excess inclusion described in Sec.  1.860G-3(b)(2) and the 
portion of an amount described in Sec.  1.860G-3(b)(1) that is an 
excess inclusion.
* * * * *
    (d) * * *
    (4) Withholding exemption inapplicable. The exemption in Sec.  
1.1441-2(d) from the obligation to withhold shall not apply to amounts 
described in Sec.  1.860G-3(b)(1) (regarding certain partnership 
allocations of REMIC net income with respect to a REMIC residual 
interest).
* * * * *

[[Page 40173]]

Sec.  1.1441-2T  [Removed]

0
Par. 12. Section 1.1441-2T is removed.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
    Approved: June 30, 2008.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E8-15940 Filed 7-11-08; 8:45 am]
BILLING CODE 4830-01-P