[Code of Federal Regulations]
[Title 26, Volume 9]
[Revised as of April 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.860F-2]

[Page 102-104]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.860F-2  Transfers to a REMIC.

    (a) Formation of a REMIC--(1) In general. For Federal income tax 
purposes, a REMIC formation is characterized as the contribution of 
assets by a sponsor (as defined in paragraph (b)(1) of this section) to 
a REMIC in exchange for REMIC regular and residual interests. If, 
instead of exchanging its interest in mortgages and related assets for 
regular and residual interests, the sponsor arranges to have the REMIC 
issue some or all of the regular and residual interests for cash, after 
which the sponsor sells its interests in mortgages and related assets to 
the REMIC, the transaction is, nevertheless, viewed for Federal income 
tax purposes as the sponsor's exchange of mortgages and related assets 
for regular and residual interests, followed by a sale of some or all of 
those interests. The purpose of this rule is to ensure that the tax 
consequences associated with the formation of a REMIC are not affected 
by the actual sequence of steps taken by the sponsor.
    (2) Tiered arrangements--(i) Two or more REMICs formed pursuant to a 
single set of organizational documents. Two or more REMICs can be 
created pursuant to a single set of organizational documents even if for 
state law purposes or for Federal securities law purposes those 
documents create only one organization. The organizational documents 
must, however, clearly and expressly identify the assets of, and the 
interests in, each REMIC, and each REMIC must satisfy all of the 
requirements of section 860D and the related regulations.
    (ii) A REMIC and one or more investment trusts formed pursuant to a 
single set of documents. A REMIC (or two or more REMICs) and one or more 
investment trusts can be created pursuant to a single set of 
organizational documents and the separate existence of the REMIC(s) and 
the investment trust(s) will be respected for Federal income tax 
purposes even if for state law purposes or for Federal securities law 
purposes those documents create only one organization. The 
organizational documents for the REMIC(s) and the investment trust(s) 
must, however, require both the REMIC(s) and the investment trust(s) to 
account for items of income and ownership of assets for Federal tax 
purposes in a manner that respects the separate existence of the 
multiple entities. See Sec. 1.860G-2(i) concerning issuance of regular 
interests coupled with other contractual rights for an illustration of 
the provisions of this paragraph.
    (b) Treatment of sponsor--(1) Sponsor defined. A sponsor is a person 
who directly or indirectly exchanges qualified mortgages and related 
assets for regular and residual interests in a REMIC. A person 
indirectly exchanges interests in qualified mortgages and related assets 
for regular and residual interests in a REMIC if the person transfers, 
other than in a nonrecognition transaction, the mortgages and related 
assets to another person who acquires a

[[Page 103]]

transitory ownership interest in those assets before exchanging them for 
interests in the REMIC, after which the transitory owner then transfers 
some or all of the interests in the REMIC to the first person.
    (2) Nonrecognition of gain or loss. The sponsor does not recognize 
gain or loss on the direct or indirect transfer of any property to a 
REMIC in exchange for regular or residual interests in the REMIC. 
However, the sponsor, upon a subsequent sale of the REMIC regular or 
residual interests, may recognize gain or loss with respect to those 
interests.
    (3) Basis of contributed assets allocated among interests--(i) In 
general. The aggregate of the adjusted bases of the regular and residual 
interests received by the sponsor in the exchange described in paragraph 
(a) of this section is equal to the aggregate of the adjusted bases of 
the property transferred by the sponsor in the exchange, increased by 
the amount of organizational expenses (as described in paragraph 
(b)(3)(ii) of this section). That total is allocated among all the 
interests received in proportion to their fair market values on the 
pricing date (as defined in paragraph (b)(3)(iii) of this section) if 
any, or, if none, the startup day (as defined in section 860G(a)(9) and 
Sec. 1.860G-2(k)).
    (ii) Organizational expenses--(A) Organizational expense defined. An 
organizational expense is an expense that is incurred by the sponsor or 
by the REMIC and that is directly related to the creation of the REMIC. 
Further, the organizational expense must be incurred during a period 
beginning a reasonable time before the startup day and ending before the 
date prescribed by law for filing the first REMIC tax return (determined 
without regard to any extensions of time to file). The following are 
examples of organizational expenses: legal fees for services related to 
the formation of the REMIC, such as preparation of a pooling and 
servicing agreement and trust indenture; accounting fees related to the 
formation of the REMIC; and other administrative costs related to the 
formation of the REMIC.
    (B) Syndication expenses. Syndication expenses are not 
organizational expenses. Syndication expenses are those expenses 
incurred by the sponsor or other person to market the interests in a 
REMIC, and, thus, are applied to reduce the amount realized on the sale 
of the interests. Examples of syndication expenses are brokerage fees, 
registration fees, fees of an underwriter or placement agent, and 
printing costs of the prospectus or placement memorandum and other 
selling or promotional material.
    (iii) Pricing date. The term ``pricing date'' means the date on 
which the terms of the regular and residual interests are fixed and the 
prices at which a substantial portion of the regular interests will be 
sold are fixed.
    (4) Treatment of unrecognized gain or loss--(i) Unrecognized gain on 
regular interests. For purposes of section 860F(b)(1)(C)(i), the sponsor 
must include in gross income the excess of the issue price of a regular 
interest over the sponsor's basis in the interest as if the excess were 
market discount (as defined in section 1278(a)(2)) on a bond and the 
sponsor had made an election under section 1278(b) to include this 
market discount currently in gross income. The sponsor is not, however, 
by reason of this paragraph (b)(4)(i), deemed to have made an election 
under section 1278(b) with respect to any other bonds.
    (ii) Unrecognized loss on regular interests. For purposes of section 
860F(b)(1)(D)(i), the sponsor treats the excess of the sponsor's basis 
in a regular interest over the issue price of the interest as if that 
excess were amortizable bond premium (as defined in section 171(b)) on a 
taxable bond and the sponsor had made an election under section 171(c). 
The sponsor is not, however, by reason of this paragraph (b)(4)(ii), 
deemed to have made an election under section 171(c) with respect to any 
other bonds.
    (iii) Unrecognized gain on residual interests. For purposes of 
section 860F(b)(1)(C)(ii), the sponsor must include in gross income the 
excess of the issue price of a residual interest over the sponsor's 
basis in the interest ratably over the anticipated weighted average life 
of the REMIC (as defined in Sec. 1.860E-1(a)(3)(iv)).
    (iv) Unrecognized loss on residual interests. For purposes of 
section

[[Page 104]]

860F(b)(1)(D)(ii), the sponsor deducts the excess of the sponsor's basis 
in a residual interest over the issue price of the interest ratably over 
the anticipated weighted average life of the REMIC.
    (5) Additions to or reductions of the sponsor's basis. The sponsor's 
basis in a regular or residual interest is increased by any amount 
included in the sponsor's gross income under paragraph (b)(4) of this 
section. The sponsor's basis in a regular or residual interest is 
decreased by any amount allowed as a deduction and by any amount applied 
to reduce interest payments to the sponsor under paragraph (b)(4)(ii) of 
this section.
    (6) Transferred basis property. For purposes of paragraph (b)(4) of 
this section, a transferee of a regular or residual interest is treated 
in the same manner as the sponsor to the extent that the basis of the 
transferee in the interest is determined in whole or in part by 
reference to the basis of the interest in the hands of the sponsor.
    (c) REMIC's basis in contributed assets. For purposes of section 
860F(b)(2), the aggregate of the REMIC's bases in the assets contributed 
by the sponsor to the REMIC in a transaction described in paragraph (a) 
of this section is equal to the aggregate of the issue prices 
(determined under section 860G(a)(10) and Sec. 1.86G-1(d)) of all 
regular and residual interests in the REMIC.

[T.D. 8458, 57 FR 61304, Dec. 24, 1992; 58 FR 8098, Feb. 11, 1993]