
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC860E]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
Subchapter M--Regulated Investment Companies and Real Estate Investment 
                                 Trusts
 
            PART IV--REAL ESTATE MORTGAGE INVESTMENT CONDUITS
 
Sec. 860E. Treatment of income in excess of daily accruals on 
        residual interests
        

(a) Excess inclusions may not be offset by net operating losses

                           (1) In general

        The taxable income of any holder of a residual interest in a 
    REMIC for any taxable year shall in no event be less than the excess 
    inclusion for such taxable year.

               (2) Special rule for affiliated groups

        All members of an affiliated group filing a consolidated return 
    shall be treated as 1 taxpayer for purposes of this subsection.

                  (3) Coordination with section 172

        Any excess inclusion for any taxable year shall not be taken 
    into account--
            (A) in determining under section 172 the amount of any net 
        operating loss for such taxable year, and
            (B) in determining taxable income for such taxable year for 
        purposes of the 2nd sentence of section 172(b)(2).

                  (4) Coordination with minimum tax

        For purposes of part VI of subchapter A of this chapter--
            (A) the reference in section 55(b)(2) to taxable income 
        shall be treated as a reference to taxable income determined 
        without regard to this subsection,
            (B) the alternative minimum taxable income of any holder of 
        a residual interest in a REMIC for any taxable year shall in no 
        event be less than the excess inclusion for such taxable year, 
        and
            (C) any excess inclusion shall be disregarded for purposes 
        of computing the alternative tax net operating loss deduction.

(b) Organizations subject to unrelated business tax

    If the holder of any residual interest in a REMIC is an organization 
subject to the tax imposed by section 511, the excess inclusion of such 
holder for any taxable year shall be treated as unrelated business 
taxable income of such holder for purposes of section 511.

(c) Excess inclusion

    For purposes of this section--

                           (1) In general

        The term ``excess inclusion'' means, with respect to any 
    residual interest in a REMIC for any calendar quarter, the excess 
    (if any) of--
            (A) the amount taken into account with respect to such 
        interest by the holder under section 860C(a), over
            (B) the sum of the daily accruals with respect to such 
        interest for days during such calendar quarter while held by 
        such holder.

    To the extent provided in regulations, if residual interests in a 
    REMIC do not have significant value, the excess inclusions with 
    respect to such interests shall be the amount determined under 
    subparagraph (A) without regard to subparagraph (B).

                 (2) Determination of daily accruals

        (A) In general

            For purposes of this subsection, the daily accrual with 
        respect to any residual interest for any day in any calendar 
        quarter shall be determined by allocating to each day in such 
        quarter its ratable portion of the product of--
                (i) the adjusted issue price of such interest at the 
            beginning of such quarter, and
                (ii) 120 percent of the long-term Federal rate 
            (determined on the basis of compounding at the close of each 
            calendar quarter and properly adjusted for the length of 
            such quarter).

        (B) Adjusted issue price

            For purposes of this paragraph, the adjusted issue price of 
        any residual interest at the beginning of any calendar quarter 
        is the issue price of the residual interest (adjusted for 
        contributions)--
                (i) increased by the amount of daily accruals for prior 
            quarters, and
                (ii) decreased (but not below zero) by any distribution 
            made with respect to such interest before the beginning of 
            such quarter.

        (C) Federal long-term rate

            For purposes of this paragraph, the term ``Federal long-term 
        rate'' means the Federal long-term rate which would have applied 
        to the residual interest under section 1274(d) (determined 
        without regard to paragraph (2) thereof) if it were a debt 
        instrument.

(d) Treatment of residual interests held by real estate investment 
        trusts

    If a residual interest in a REMIC is held by a real estate 
investment trust, under regulations prescribed by the Secretary--
        (1) any excess of--
            (A) the aggregate excess inclusions determined with respect 
        to such interests, over
            (B) the real estate investment trust taxable income (within 
        the meaning of section 857(b)(2), excluding any net capital 
        gain),

    shall be allocated among the shareholders of such trust in 
    proportion to the dividends received by such shareholders from such 
    trust, and
        (2) any amount allocated to a shareholder under paragraph (1) 
    shall be treated as an excess inclusion with respect to a residual 
    interest held by such shareholder.

Rules similar to the rules of the preceding sentence shall apply also in 
the case of regulated investment companies, common trust funds, and 
organizations to which part I of subchapter T applies.

(e) Tax on transfers of residual interests to certain organizations, 
        etc.

                           (1) In general

        A tax is hereby imposed on any transfer of a residual interest 
    in a REMIC to a disqualified organization.

                          (2) Amount of tax

        The amount of the tax imposed by paragraph (1) on any transfer 
    of a residual interest shall be equal to the product of--
            (A) the amount (determined under regulations) equal to the 
        present value of the total anticipated excess inclusions with 
        respect to such interest for periods after such transfer, 
        multiplied by
            (B) the highest rate of tax specified in section 11(b)(1).

                            (3) Liability

        The tax imposed by paragraph (1) on any transfer shall be paid 
    by the transferor; except that, where such transfer is through an 
    agent for a disqualified organization, such tax shall be paid by 
    such agent.

                 (4) Transferee furnishes affidavit

        The person (otherwise liable for any tax imposed by paragraph 
    (1)) shall be relieved of liability for the tax imposed by paragraph 
    (1) with respect to any transfer if--
            (A) the transferee furnishes to such person an affidavit 
        that the transferee is not a disqualified organization, and
            (B) as of the time of the transfer, such person does not 
        have actual knowledge that such affidavit is false.

                    (5) Disqualified organization

        For purposes of this section, the term ``disqualified 
    organization'' means--
            (A) the United States, any State or political subdivision 
        thereof, any foreign government, any international organization, 
        or any agency or instrumentality of any of the foregoing,
            (B) any organization (other than a cooperative described in 
        section 521) which is exempt from tax imposed by this chapter 
        unless such organization is subject to the tax imposed by 
        section 511, and
            (C) any organization described in section 1381(a)(2)(C).

    For purposes of subparagraph (A), the rules of section 168(h)(2)(D) 
    (relating to treatment of certain taxable instrumentalities) shall 
    apply; except that, in the case of the Federal Home Loan Mortgage 
    Corporation, clause (ii) of such section shall not apply.

                 (6) Treatment of pass-thru entities

        (A) Imposition of tax

            If, at any time during any taxable year of a pass-thru 
        entity, a disqualified organization is the record holder of an 
        interest in such entity, there is hereby imposed on such entity 
        for such taxable year a tax equal to the product of--
                (i) the amount of excess inclusions for such taxable 
            year allocable to the interest held by such disqualified 
            organization, multiplied by
                (ii) the highest rate of tax specified in section 
            11(b)(1).

        (B) Pass-thru entity

            For purposes of this paragraph, the term ``pass-thru 
        entity'' means--
                (i) any regulated investment company, real estate 
            investment trust, or common trust fund,
                (ii) any partnership, trust, or estate, and
                (iii) any organization to which part I of subchapter T 
            applies.

        Except as provided in regulations, a person holding an interest 
        in a pass-thru entity as a nominee for another person shall, 
        with respect to such interest, be treated as a pass-thru entity.

        (C) Tax to be deductible

            Any tax imposed by this paragraph with respect to any excess 
        inclusion of any pass-thru entity for any taxable year shall, 
        for purposes of this title (other than this subsection), be 
        applied against (and operate to reduce) the amount included in 
        gross income with respect to the residual interest involved.

        (D) Exception where holder furnishes affidavit

            No tax shall be imposed by subparagraph (A) with respect to 
        any interest in a pass-thru entity for any period if--
                (i) the record holder of such interest furnishes to such 
            pass-thru entity an affidavit that such record holder is not 
            a disqualified organization, and
                (ii) during such period, the pass-thru entity does not 
            have actual knowledge that such affidavit is false.

                             (7) Waiver

        The Secretary may waive the tax imposed by paragraph (1) on any 
    transfer if--
            (A) within a reasonable time after discovery that the 
        transfer was subject to tax under paragraph (1), steps are taken 
        so that the interest is no longer held by the disqualified 
        organization, and
            (B) there is paid to the Secretary such amounts as the 
        Secretary may require.

                    (8) Administrative provisions

        For purposes of subtitle F, the taxes imposed by this subsection 
    shall be treated as excise taxes with respect to which the 
    deficiency procedures of such subtitle apply.

(f) Treatment of variable insurance contracts

    Except as provided in regulations, with respect to any variable 
contract (as defined in section 817), there shall be no adjustment in 
the reserve to the extent of any excess inclusion.

(Added Pub. L. 99-514, title VI, Sec. 671(a), Oct. 22, 1986, 100 Stat. 
2311; amended Pub. L. 100-647, title I, Sec. 1006(t)(13), (15), (16)(B), 
(17), (23), (26), (27), Nov. 10, 1988, 102 Stat. 3423, 3426, 3427; Pub. 
L. 104-188, title I, Secs. 1616(b)(10), 1704(h)(1), Aug. 20, 1996, 110 
Stat. 1857, 1881.)


                               Amendments

    1996--Subsec. (a)(1). Pub. L. 104-188, Sec. 1616(b)(10)(A), 
substituted ``The'' for ``Except as provided in paragraph (2), the''.
    Subsec. (a)(2). Pub. L. 104-188, Sec. 1616(b)(10)(B), (C), 
redesignated par. (3) as (2), struck out ``, except that paragraph (2) 
shall be applied separately with respect to each corporation which is a 
member of such group and to which section 593 applies'' after ``of this 
subsection'', and struck out former par. (2) which read as follows: 
``Exception for certain financial institutions.--Paragraph (1) shall not 
apply to any organization to which section 593 applies. The Secretary 
may by regulations provide that the preceding sentence shall not apply 
where necessary or appropriate to prevent avoidance of tax imposed by 
this chapter.''
    Subsec. (a)(3). Pub. L. 104-188, Sec. 1616(b)(10)(B), redesignated 
par. (5) as (3). Former par. (3) redesignated (2).
    Subsec. (a)(4). Pub. L. 104-188, Sec. 1616(b)(10)(B), (D), 
redesignated par. (6) as (4), struck out at end ``The preceding sentence 
shall not apply to any organization to which section 593 applies, except 
to the extent provided in regulations prescribed by the Secretary under 
paragraph (2).'', and struck out former par. (4) which related to 
certain subsidiaries being treated as single corporations to which 
section 593 applied.
    Subsec. (a)(5). Pub. L. 104-188, Sec. 1616(b)(10)(B), redesignated 
par. (5) as (3).
    Subsec. (a)(6). Pub. L. 104-188, Sec. 1616(b)(10)(B), redesignated 
par. (6) as (4).
    Pub. L. 104-188, Sec. 1704(h)(1), added par. (6).
    1988--Subsec. (a)(3), (4). Pub. L. 100-647, Sec. 1006(t)(15), added 
pars. (3) and (4).
    Subsec. (a)(5). Pub. L. 100-647, Sec. 1006(t)(27), added par. (5).
    Subsec. (c)(2)(B). Pub. L. 100-647, Sec. 1006(t)(13), (17), 
substituted ``issue price of the residual interest (adjusted for 
contributions)'' for ``issue price of residual interest'' in 
introductory text, and in cl. (ii) inserted ``(but not below zero)'' 
after ``decreased''.
    Subsec. (d). Pub. L. 100-647, Sec. 1006(t)(23), inserted at end 
``Rules similar to the rules of the preceding sentence shall apply also 
in the case of regulated investment companies, common trust funds, and 
organizations to which part I of subchapter T applies.''
    Subsec. (e). Pub. L. 100-647, Sec. 1006(t)(16)(B), added subsec. 
(e).
    Subsec. (f). Pub. L. 100-647, Sec. 1006(t)(26), added subsec. (f).


                    Effective Date of 1996 Amendment

    Amendment by section 1616(b)(10) of Pub. L. 104-188 applicable to 
taxable years beginning after Dec. 31, 1995, but not applicable to any 
residual interest held by a taxpayer if such interest has been held by 
such taxpayer at all times since Oct. 31, 1995, see section 1616(c)(1), 
(4) of Pub. L. 104-188, set out as a note under section 593 of this 
title.
    Section 1704(h)(2) of Pub. L. 104-188 provided that: ``The amendment 
made by paragraph (1) [amending this section] shall take effect as if 
included in the amendments made by section 671 of the Tax Reform Act of 
1986 [Pub. L. 99-514] unless the taxpayer elects to apply such amendment 
only to taxable years beginning after the date of the enactment of this 
Act [Aug. 20, 1996].''


                    Effective Date of 1988 Amendment

    Section 1006(t)(16)(D)(ii)-(iv) of Pub. L. 100-647 provided that:
    ``(ii) The amendments made by subparagraphs (B) and (C) [amending 
this section and section 26 of this title] (except to the extent they 
relate to paragraph (6) of section 860E(e) of the 1986 Code as added by 
such amendments) shall apply to transfers after March 31, 1988; except 
that such amendments shall not apply to any transfer pursuant to a 
binding written contract in effect on such date.
    ``(iii) Except as provided in clause (iv), the amendments made by 
subparagraphs (B) and (C) (to the extent they relate to paragraph (6) of 
section 860E(e) of the 1986 Code as so added) shall apply to excess 
inclusions for periods after March 31, 1988 but only to the extent such 
inclusions are--
        ``(I) allocable to an interest in a pass-thru entity acquired 
    after March 31, 1988, or
        ``(II) allocable to an interest in a pass-thru entity acquired 
    on or before March 31, 1988, but attributable to a residual interest 
    acquired by the pass-thru entity after March 31, 1988.
For purposes of the preceding sentence, any interest in a pass-thru 
entity (or residual interest) acquired after March 31, 1988, pursuant to 
a binding written contract in effect on such date shall be treated as 
acquired before such date.
    ``(iv) In the case of any real estate investment trust, regulated 
investment company, common trust fund, or publicly traded partnership, 
no tax shall be imposed under section 860E(e)(6) of the 1986 Code (as 
added by the amendment made by subparagraph (B)) for any taxable year 
beginning before January 1, 1989.''
    Amendment by section 1006(t)(13), (15), (17), (23), (26), (27) of 
Pub. L. 100-647 effective, except as otherwise provided, as if included 
in the provision of the Tax Reform Act of 1986, Pub. L. 99-514, to which 
such amendment relates, see section 1019(a) of Pub. L. 100-647, set out 
as a note under section 1 of this title.

                  Section Referred to in Other Sections

    This section is referred to in sections 26, 774, 857, 860C, 860D, 
860F, 860J, 860K, 7701 of this title.
