
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: 26USC860F]

 
                     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. 860F. Other rules


(a) 100 percent tax on prohibited transactions

                           (1) Tax imposed

        There is hereby imposed for each taxable year of a REMIC a tax 
    equal to 100 percent of the net income derived from prohibited 
    transactions.

                     (2) Prohibited transaction

        For purposes of this part, the term ``prohibited transaction'' 
    means--

        (A) Disposition of qualified mortgage

            The disposition of any qualified mortgage transferred to the 
        REMIC other than a disposition pursuant to--
                (i) the substitution of a qualified replacement mortgage 
            for a qualified mortgage (or the repurchase in lieu of 
            substitution of a defective obligation),
                (ii) a disposition incident to the foreclosure, default, 
            or imminent default of the mortgage,
                (iii) the bankruptcy or insolvency of the REMIC, or
                (iv) a qualified liquidation.

        (B) Income from nonpermitted assets

            The receipt of any income attributable to any asset which is 
        neither a qualified mortgage nor a permitted investment.

        (C) Compensation for services

            The receipt by the REMIC of any amount representing a fee or 
        other compensation for services.

        (D) Gain from disposition of cash flow investments

            Gain from the disposition of any cash flow investment other 
        than pursuant to any qualified liquidation.

                   (3) Determination of net income

        For purposes of paragraph (1), the term ``net income derived 
    from prohibited transactions'' means the excess of the gross income 
    from prohibited transactions over the deductions allowed by this 
    chapter which are directly connected with such transactions; except 
    that there shall not be taken into account any item attributable to 
    any prohibited transaction for which there was a loss.

                      (4) Qualified liquidation

        For purposes of this part--

        (A) In general

            The term ``qualified liquidation'' means a transaction in 
        which--
                (i) the REMIC adopts a plan of complete liquidation,
                (ii) such REMIC sells all its assets (other than cash) 
            within the liquidation period, and
                (iii) all proceeds of the liquidation (plus the cash), 
            less assets retained to meet claims, are credited or 
            distributed to holders of regular or residual interests on 
            or before the last day of the liquidation period.

        (B) Liquidation period

            The term ``liquidation period'' means the period--
                (i) beginning on the date of the adoption of the plan of 
            liquidation, and
                (ii) ending at the close of the 90th day after such 
            date.

                           (5) Exceptions

        Notwithstanding subparagraphs (A) and (D) of paragraph (2), the 
    term ``prohibited transaction'' shall not include any disposition--
            (A) required to prevent default on a regular interest where 
        the threatened default resulted from a default on 1 or more 
        qualified mortgages, or
            (B) to facilitate a clean-up call (as defined in 
        regulations).

(b) Treatment of transfers to the REMIC

                     (1) Treatment of transferor

        (A) Nonrecognition gain or loss

            No gain or loss shall be recognized to the transferor on the 
        transfer of any property to a REMIC in exchange for regular or 
        residual interests in such REMIC.

        (B) Adjusted bases of interests

            The adjusted bases of the regular and residual interests 
        received in a transfer described in subparagraph (A) shall be 
        equal to the aggregate adjusted bases of the property 
        transferred in such transfer. Such amount shall be allocated 
        among such interests in proportion to their respective fair 
        market values.

        (C) Treatment of nonrecognized gain

            If the issue price of any regular or residual interest 
        exceeds its adjusted basis as determined under subparagraph (B), 
        for periods during which such interest is held by the transferor 
        (or by any other person whose basis is determined in whole or in 
        part by reference to the basis of such interest in the hand of 
        the transferor)--
                (i) in the case of a regular interest, such excess shall 
            be included in gross income (as determined under rules 
            similar to rules of section 1276(b)), and
                (ii) in the case of a residual interest, such excess 
            shall be included in gross income ratably over the 
            anticipated period during which the REMIC will be in 
            existence.

        (D) Treatment of nonrecognized loss

            If the adjusted basis of any regular or residual interest 
        received in a transfer described in subparagraph (A) exceeds its 
        issue price, for periods during which such interest is held by 
        the transferor (or by any other person whose basis is determined 
        in whole or in part by reference to the basis of such interest 
        in the hand of the transferor)--
                (i) in the case of a regular interest, such excess shall 
            be allowable as a deduction under rules similar to the rules 
            of section 171, and
                (ii) in the case of a residual interest, such excess 
            shall be allowable as a deduction ratably over the 
            anticipated period during which the REMIC will be in 
            existence.

                         (2) Basis to REMIC

        The basis of any property received by a REMIC in a transfer 
    described in paragraph (1)(A) shall be its fair market value 
    immediately after such transfer.

(c) Distributions of property

    If a REMIC makes a distribution of property with respect to any 
regular or residual interest--
        (1) notwithstanding any other provision of this subtitle, gain 
    shall be recognized to such REMIC on the distribution in the same 
    manner as if it had sold such property to the distributee at its 
    fair market value, and
        (2) the basis of the distributee in such property shall be its 
    fair market value.

(d) Coordination with wash sale rules

    For purposes of section 1091--
        (1) any residual interest in a REMIC shall be treated as a 
    security, and
        (2) in applying such section to any loss claimed to have been 
    sustained on the sale or other disposition of a residual interest in 
    a REMIC--
            (A) except as provided in regulations, any residual interest 
        in any REMIC and any interest in a taxable mortgage pool (as 
        defined in section 7701(i)) comparable to a residual interest in 
        a REMIC shall be treated as substantially identical stock or 
        securities, and
            (B) subsections (a) and (e) of such section shall be applied 
        by substituting ``6 months'' for ``30 days'' each place it 
        appears.

(e) Treatment under subtitle F

    For purposes of subtitle F, a REMIC shall be treated as a 
partnership (and holders of residual interests in such REMIC shall be 
treated as partners). Any return required by reason of the preceding 
sentence shall include the amount of the daily accruals determined under 
section 860E(c). Such return shall be filed by the REMIC. The 
determination of who may sign such return shall be made without regard 
to the first sentence of this subsection.

(Added Pub. L. 99-514, title VI, Sec. 671(a), Oct. 22, 1986, 100 Stat. 
2313; amended Pub. L. 100-647, title I, Sec. 1006(t)(3), (4), (14), 
(18)(A), (22)(B)-(E), Nov. 10, 1988, 102 Stat. 3419, 3420, 3423, 3426; 
Pub. L. 104-188, title I, Sec. 1704(t)(74), Aug. 20, 1996, 110 Stat. 
1891.)


                               Amendments

    1996--Subsec. (a)(5). Pub. L. 104-188 substituted ``paragraph (2)'' 
for ``paragraph (1)'' in introductory provisions.
    1988--Subsec. (a)(2)(A). Pub. L. 100-647, Sec. 1006(t)(3)(B)(i), 
struck out at end ``Notwithstanding the preceding sentence, the term 
`prohibited transaction' shall not include any disposition required to 
prevent default on a regular interest where the threatened default 
resulted from a default on 1 or more qualified mortgages.''
    Subsec. (a)(2)(A)(i). Pub. L. 100-647, Sec. 1006(t)(3)(A), amended 
cl. (i) generally. Prior to amendment, cl. (i) read as follows: ``the 
substitution of a qualified replacement mortgage for a qualified 
mortgage,''.
    Subsec. (a)(2)(A)(iii), (C). Pub. L. 100-647, Sec. 1006(t)(22)(B), 
(C), substituted ``REMIC'' for ``real estate mortgage pool''.
    Subsec. (a)(2)(D). Pub. L. 100-647, Sec. 1006(t)(3)(C), struck out 
``described in subsection (b)'' before period at end.
    Subsec. (a)(5). Pub. L. 100-647, Sec. 1006(t)(3)(B)(ii), added par. 
(5).
    Subsec. (b)(1)(A). Pub. L. 100-647, Sec. 1006(t)(4), substituted 
``the transfer of any property to a REMIC in exchange for regular or 
residual interests in such REMIC'' for ``the transfer of any property to 
a REMIC''.
    Subsec. (b)(1)(C)(ii). Pub. L. 100-647, Sec. 1006(t)(22)(D), 
substituted ``REMIC'' for ``real estate mortgage pool''.
    Subsec. (b)(1)(D)(ii). Pub. L. 100-647, Sec. 1006(t)(14), (22)(E), 
amended cl. (ii) identically, substituting ``REMIC'' for ``real estate 
mortgage pool''.
    Subsec. (e). Pub. L. 100-647, Sec. 1006(t)(18)(A), inserted at end 
``Such return shall be filed by the REMIC. The determination of who may 
sign such return shall be made without regard to the first sentence of 
this subsection.''


                    Effective Date of 1988 Amendment

    Section 1006(t)(18)(B) of Pub. L. 100-647 provided that: ``Unless 
the REMIC otherwise elects, the amendment made by subparagraph (A) 
[amending this section] shall not apply to any REMIC where the start-up 
day (as defined in section 860G(a)(9) of the 1986 Code as in effect on 
the day before the date of the enactment of this Act [Nov. 10, 1988]) is 
before the date of the enactment of this Act.''
    Amendment by section 1006(t)(3), (4), (14), (22)(B)-(E) 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 860D, 860L of this title.
