[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: 26CFR1.860G-3]

[Page 119]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.860G-3  Treatment of foreign persons.

    (a) Transfer of a residual interest with tax avoidance potential--
(1) In general. A transfer of a residual interest that has tax avoidance 
potential is disregarded for all Federal tax purposes if the transferee 
is a foreign person. Thus, if a residual interest with tax avoidance 
potential is transferred to a foreign holder at formation of the REMIC, 
the sponsor is liable for the tax on any excess inclusion that accrues 
with respect to that residual interest.
    (2) Tax avoidance potential--(i) Defined. A residual interest has 
tax avoidance potential for purposes of this section unless, at the time 
of the transfer, the transferor reasonably expects that, for each excess 
inclusion, the REMIC will distribute to the transferee residual interest 
holder an amount that will equal at least 30 percent of the excess 
inclusion, and that each such amount will be distributed at or after the 
time at which the excess inclusion accrues and not later than the close 
of the calendar year following the calendar year of accrual.
    (ii) Safe harbor. For purposes of paragraph (a)(2)(i) of this 
section, a transferor has a reasonable expectation if the 30-percent 
test would be satisfied were the REMIC's qualified mortgages to prepay 
at each rate within a range of rates from 50 percent to 200 percent of 
the rate assumed under section 1272(a)(6) with respect to the qualified 
mortgages (or the rate that would have been assumed had the mortgages 
been issued with original issue discount).
    (3) Effectively connected income. Paragraph (a)(1) of this section 
will not apply if the transferee's income from the residual interest is 
subject to tax under section 871(b) or section 882.
    (4) Transfer by a foreign holder. If a foreign person transfers a 
residual interest to a United States person or a foreign holder in whose 
hands the income from a residual interest would be effectively connected 
income, and if the transfer has the effect of allowing the transferor to 
avoid tax on accrued excess inclusions, then the transfer is disregarded 
and the transferor continues to be treated as the owner of the residual 
interest for purposes of section 871(a), 881, 1441, or 1442.
    (b) [Reserved]

[T.D. 8458, 57 FR 61313, Dec. 24, 1992]

  TAX BASED ON INCOME FROM SOURCES WITHIN OR WITHOUT THE UNITED STATES

                   Determination of Sources of Income