Federal Income Taxation of Securitization Transactions - Update

October 10, 2006

For those of you who are readers of Peaslee & Nirenberg, Federal Income Taxation of Securitization Transactions, please note that a new cumulative supplement to the book (No. 6) has been posted on the book’s Web site (www.securitizationtax.com). It brings the book up to date through October 10, 2006. The supplement can be downloaded by you or your library staff for free (so you will certainly get your money’s worth). The supplement covers quite a few items. Some of the more important ones are summarized in bullet points below. Although the supplement is intended to be used with the book, it may also be useful standing alone as a report on recent changes in the area.

If you have questions about any of the topics addressed in the supplement, feel free to contact James Peaslee.

Overview of Supplement 6

New Topics/Securities

  • Treatment of agency arrangements in which the agent is owned by the principal–-another body of law relating to tax ownership. See Chapter 3, Part D.1.m.
  • Aggregation of REMICs in calculating income from residual interests. See Chapter 9, Part D.

Changes/Clarifications of the Law

  • Revenue Procedure 2005-62, which expands a 2002 revenue procedure providing safe-harbor rules for treating as a borrowing for tax purposes debt issued in a stranded cost securitization. See Chapter 3, Part D.1.k.
  • Principal Life Insurance Company, a case supporting the view that only nominal equity is required by a special purpose, bankruptcy-remote entity that holds high quality debt instruments producing cash flows matching required payments on issued debt. See Chapter 3, Part E.2.b.(ii).
  • Treasury Regulation § 1.882-5T, which changes the safe-harbor debt-equity rule for determining the interest expense of U.S. branches of foreign banks by increasing the assumed amount of debt from 93 percent of assets (equity of 7 percent) to 95 percent (equity of 5 percent). See Chapter 3, Part E.2.c.(iii).
  • Treasury Regulation §§ 301.7701-2(b)(9) and 301.7701-5, final regulations dealing with multiple-chartered entities, which follow 2004 temporary regulations but provide greater grandfather protection. See Chapter 4, Parts B.2 and B.3, and Chapter 13, Part B.
  • Proposed Regulation § 301.7701-2(c)(2)(iv) and (v), part of a package of proposed regulations that would treat disregarded entities as separate entities for purposes of certain employment taxes and excise taxes. See Chapter 4, Part B.4.
  • P.L.R. 200613027, a ruling applying the rescission doctrine to allow a taxpayer to ignore the conversion of an LLC to a corporation where the conversion was later reversed during the same taxable year. See Chapter 4, Part B.4.
  • P.L.R. 200624005, an important ruling, which holds that floating rate and inverse floating rate strips carved out of interest payments on fixed rate mortgages qualify as stripped coupons under section 1286. See Chapter 4, Part D.6, and Chapter 8, Part D.1.
  • Proposed Regulation § 1.1221-1(e), which would overturn Burbank Liquidating and prevent a loan of money from qualifying as an ordinary asset on the ground that it represents a receivable acquired for the service of making funds available. See Chapter 4, Part F.3.b.
  • Technical corrections to AJCA 2004 changes to REMIC rules. See Chapter 6, Part B.2.a.(v).
  • Revenue Ruling 2005-47 and Revenue Procedure 2005-47, which address the treatment by credit card issuers of ATM surcharges. See Chapter 8, Part G.2.
  • Revenue Ruling 2005-68, which illustrates how the excess inclusion rules and NOL rules interact. See Chapter 9, Part E.4.a.
  • Treasury Regulation § 1.863-1T(e)(2), which treats excess inclusion income on a REMIC residual interest as income from United States sources, even if the REMIC holds exclusively foreign mortgages. See Chapter 12, Part C.1.
  • Treasury Regulation § 1.860G-3T(b), which requires a partnership holding a REMIC residual interest and having a foreign partner to pay currently withholding tax on income from the residual interest allocable to the foreign partner. See Chapter 12, Part C.1.
  • Proposed Regulation § 1.871-14(g), which, in the case of interest received from U.S. sources by a partnership or trust with foreign partners or owners, would apply the 10-percent shareholder carve out from the withholding tax exemption for portfolio interest at the owner level (and not to the partnership or trust). See Chapter 12, Part C.2.
  • Swallows Holding Ltd., a case holding that regulations requiring that a return be timely filed by a foreign corporation in order to claim deductions were invalid where the taxpayer had filed before being contacted by the Service. See Chapter 13, Part D.
  • Addition to the 2006-2007 IRS Business Plan of guidance on lending activities under section 864 (whether those activities give rise to a trade or business). See Chapter 13, Part D.3.b.
  • Treasury Regulation § 1.951-1(e)(5), a final regulation which addresses the effect of restrictions and other limitations on distributions on allocations of subpart F income among multiple classes of equity. See Chapter 13, Part G.5.
  • Treasury Regulation § 1.671-5, which beginning January 1, 2007 will apply more extensive information reporting rules to widely held fixed investment trusts (WHFITs). The regulations also provide special rules for information reporting by widely held mortgage trusts (WHMTs). See Chapter 14, Part C.

Notice 2006-6, which eliminates the book-tax category of reportable transactions. See Chapter 14, Part J.