(a) General rule. -- For purposes of this title, the terms "real estate mortgage investment conduit" and "REMIC" mean any entity --
(1) to which an election to be treated as a REMIC applies for the taxable year and all prior taxable years,
(2) all of the interests in which are regular interests or residual interests,
(3) which has 1 (and only 1) class of residual interests (and all distributions, if any, with respect to such interests are pro rata),
(4) as of the close of the 3rd month beginning after the startup day and at all times thereafter, substantially all of the assets of which consist of qualified mortgages and permitted investments,
(5) which has a taxable year which is a calendar year, and
(6) with respect to which there are reasonable arrangements designed to ensure that --
(A) residual interests in such entity are not held by disqualified organizations (as defined in section 860E(e)(5)), and
(B) information necessary for the application of section 860E(e) will be made available by the entity.
In the case of a qualified liquidation (as defined in section 860F(a)(4)(A)), paragraph (4) shall not apply during the liquidation period (as defined in section 860F(a)(4)(A)), paragraph (4) shall not apply during the liquidation period (as defined in section 860F(a)(4)(B)).
(b) Election. --
(1) In general. -- An entity (otherwise meeting the requirements of subsection (a)) may elect to be treated as a REMIC for its 1st taxable year. Such an election shall be made on its return for such 1st taxable year. Except as provided in paragraph (2), such an election shall apply to the taxable year for which made and all subsequent taxable years.
(2) Termination. --
(A) In general. -- If any entity ceases to be a REMIC at any time during the taxable year, such entity shall not be treated as a REMIC for such taxable year or any succeeding taxable year.
(B) Inadvertent terminations. -- If --
(i) an entity ceases to be a REMIC,
(ii) the Secretary determines that such cessation was inadvertent,
(iii) no later than a reasonable time after the discovery of the event resulting in such cessation, steps are taken so that such entity is once more a REMIC, and
(iv) such entity, and each person holding an interest in such entity at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of such entity as a REMIC or a C corporation) as may be required by the Secretary with respect to such period,
then, notwithstanding such terminating event, such entity shall be treated as continuing to be a REMIC (or such cessation shall be disregarded for purposes of subparagraph (A)) whichever the Secretary determines to be appropriate.
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. -- Except as provided in paragraph (2), 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) 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.
(3) 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, 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.
(4) Treatment of certain subsidiaries. --
(A) In general. -- For purposes of this subsection, a corporation to which section 593 applies and each qualified subsidiary of such corporation shall be treated as a single corporation to which section 593 applies.
(B) Qualified subsidiary. -- For purposes of this subsection, the term "qualified subsidiary" means any corporation --
(i) all the stock of which, and substantially all the indebtedness of which, is held directly by the corporation to which section 593 applies, and
(ii) which is organized and operated exclusively in connection with the organization and operation of 1 or more REMIC's.
(5) 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).
(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 retable 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 and 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
(.txt)