Reg. § 1.67-3T Allocation of expenses by real estate mortgage investment conduits (temporary).
(a) Allocation of allocable investment expenses
(1) In general A real estate mortgage investment conduit or REMIC (as defined in section ) shall allocate to each of its pass-through interest holders that holds an interest at any time during the calendar quarter the holder's proportionate share (as determined under of this section) of the aggregate amount of allocable investment expenses of the REMIC for the calendar quarter.
(2) Pass-through interest holder
(i) In general
(A) Meaning of term Except as provided in of this section, the term “pass-through interest holder” means any holder of a REMIC residual interest (as definition in section ) that is—
(1) An individual (other than a nonresident alien whose income with respect to his or her interest in the REMIC is not effectively connected with the conduct of a trade or business within the United States),
(2) A person, including a trust or estate, that computes its taxable income in the same manner as in the case of an individual, or
(3) A pass-through entity (as defined in of this section) if one or more of its partners, shareholders, beneficiaries, participants, or other interest holders is
(i) a pass-through entity or
(ii) a person described in or of this section.
(B) Examples The provisions of this may be illustrated by the following examples:
Example 1. Corporation X holds a residual interest in REMIC R in its capacity as a nominee or custodian for individual A, the beneficial owner of the interest. Because the owner of the interest for Federal income tax purposes is an individual, the interest is owned by a pass-through interest holder.
Example 2. Individual retirement account I holds a residual interest in a REMIC. Because an individual retirement account is not a person described in of this section, the interest is not held by a pass-through interest holder.
(ii) Single-class REMIC
(A) In general In the case of a single-class REMIC, the term “pass-through interest holder” means any holder of either—
(1) A REMIC regular interest (as defined in section ), or
(2) A REMIC residual interest, that is described in , , or of this section.
(B) Single-class REMIC For purposes of of this section, a single-class REMIC IS either—
(1) A REMIC that would be classified as an investment trust under but for its qualification as a REMIC under section and , or
(2) A REMIC that—
(i) Is substantially similar to an investment trust under , and
(ii) Is structured with the principal purpose of avoiding the requirement of and of this section to allocate allocable investment expenses to pass-through interest holders that hold regular interests in the REMIC.
For purposes of this , in determining whether a REMIC would be classified as an investment trust or is substantially similar to an investment trust, all interests in the REMIC shall be treated as ownership interests in the REMIC, without regard to whether or not they would be classified as debt for Federal income tax purposes in the absence of a REMIC election.
(C) Examples The provisions of of this section must be illustrated by the following examples:
Example 1. Corporation M transfers mortgages to a bank under a trust agreement as described in Example (2) of . There are two classes of certificates. Holders of class C certificates are entitled to receive 90 percent of the payment of principal and interest on the mortgages; holders of class D certificates are entitled to receive the remaining 10 percent. The two classes of certificates are identical except that, in the event of a default on the underlying mortgages, the payment rights of class D certificates holders are subordinated to the rights of class C certificate holders. M sells the class C certificates to investors and retains the class D certificates. The trust would be classified as an investment trust under but for its qualification a REMIC under section the class C certificates represent regular interests in the REMIC and the class D certificates represent residual interest in the REMIC. The REMIC is a single-class REMIC within the meaning of of this section and, accordingly, holders of both the class C and class D certificates who are described in , , or of this section are treated as pass-through interest holders.
Example 2. Assume that the facts are the same as in Example (1) except that M structures the REMIC to include a second regular interest represented by class E certificates. The principal purpose of M in structuring the REMIC to include class E certificates is to avoid allocating allocable investment expenses to class C certificate holders. The class E certificate holders are entitled to receive the payments otherwise due the class D certificate holders until they have been paid a stated amount of principal plus interest. The fair market value of the class E certificate is ten percent of the fair market value of the class D certificate and, therefore, less than one percent of the fair market value of the REMIC. The REMIC would not be classified as an investment trust under because the existence of the class E certificates is not incidental to the trust's purpose of facilitating direct investment in the assets of the trust. Nevertheless, because the fair market value of the class E certificates is de minimis, the REMIC is substantially similar to an investment trust under . In addition, avoidance of the requirement to allocate allocable investment expenses to regular interest holders is the principal purpose of M in structuring the REMIC to include class E certificates. Therefore, the REMIC is a single-class REMIC within the meaning of of this section, and, accordingly, holders of both residual and regular interests who are described in , , or of this section are treated as pass-through interest holders.
(3) Pass-through entity
(i) In general Except as provided in of this section, for purposes of this section, a pass-through entity is—
(A) A trust (or any portion thereof) to which Subpart E, Part 1, Subchapter J, Chapter 1 of the Code applies,
(B) A partnership,
(C) An S corporation,
(D) A common trust fund described in section ,
(E) A nonpublicly offered regulated investment company (as defined in of this section),
(F) A REMIC, and
(G) Any other person—
(1) Which is not subject to income tax imposed by Subtitle A, Chapter 1, or which is allowed a deduction in computing such tax for distributions to owners or beneficiaries, and
(2) The character of the income of which may affect the character of the income recognized with respect to that person by its owners or beneficiaries.
Entities that do not meet the requirements of paragraphs (a)(3)(i)(G) (1) and (2), such as qualified pension plans, individual retirement accounts, and insurance companies holding assets in separate asset accounts to fund variable contracts defined in section , are not described in this .
(ii) Exception For purposes of this section, a pass-through entity does not include—
(A) An estate,
(B) A trust (or any portion thereof) not described in of this section,
(C) A cooperative described without regard to subparagraphs (A) and (C) thereof, or
(D) A real estate investment trust.
(4) Allocable investment expenses The term “allocable investment expenses” means the aggregate amount of the expenses paid or accrued in the calendar quarter for which a deduction is allowable under section in determining the taxable income of the REMIC for the calendar quarter.
(5) Nonpublicly offered regulated investment company
(i) In general For purposes of this section, the term “nonpublicly offered regulated investment company” means a regulated investment company to which Part I of Subchapter M of the Code applies that is not a publicly offered regulated investment company.
(ii) Publicly offered regulated investment company For purposes of this section, the term “publicly offered regulated investment company” means a regulated investment company to which Part I of subchapter M of the Code applies, the shares of which are—
(A) Continuously offered pursuant to a public offering (within the meaning of section 4 of the Securities Act of 1933, as amended (15 U.S.C. 77a to 77aa)),
(B) Regularly traded on an established securities market, or
(C) Held by or for no fewer than 500 persons at all times during the taxable year.
(b) Treatment of allocable investment expenses
(1) By pass-through interest holders
(i) Taxable year ending with calendar quarter A pass-through interest holder whose taxable year is the calendar year or ends with a calendar quarter shall be treated as having—
(A) Received or accrued income, and
(B) Paid or incurred an expense described in section (or section in the case of a pass-through interest holder that is a regulated investment company), in an amount equal to the pass-through interest holder's proportionate share of the allocable investment expenses of the REMIC for those calendar quarters that fall within the holder's taxable year.
(ii) Taxable year not ending with calendar quarter A pass-through interest holder whose taxable year does not end with a calendar quarter shall be treated as having—
(A) Received or accrued income, and
(B) Paid or incurred an expense described in section (or section in the case of a pass-through interest holder that is a regulated investment company), in an amount equal to the sum of—
(C) The pass-through interest holder's proportionate share of the allocable investment expenses of the REMIC for those calendar quarters that fall within the holder's taxable year, and
(D) For each calendar quarter that overlaps the beginning or end of the taxable year, the sum of the daily amounts of the allocable investment expenses allocated to the holder pursuant to of this section for the days in the quarter that fall within the holder's taxable year.
(2) Proportionate share of allocable investment expenses For purposes of of this section, a pass-through interest holder's proportionate share of the allocable investment expenses is the amount allocated to the pass-through interest holder pursuant to of this section.
(3) Cross-reference See with respect to limitations on deductions for expenses described in section (including amounts treated as such expenses under this section).
(4) Interest income to holders of regular interests in certain REMICs Any amount allocated under this section to the holder of a regular interest in a single-class REMIC (as described in of this section) shall be treated as interest income.
(5) No adjustment to basis The basis of any holder's interest in a REMIC shall not be increased or decreased by the amount of the holder's proportionate share of allocable investment expenses.
(6) Interest holders other than pass-through interest holders An interest holder of a REMIC that is not a pass-through interest holder shall not take into account in computing its taxable income any amount of income or expense with respect to its proportionate share of allocable investment expenses.
(c) Computation of proportionate share
(1) In general For purposes of of this section, a REMIC shall compute a pass-through interest holder's proportionate share of the REMIC's allocable investment expenses by—
(i) Determining the daily amount of the allocable investment expenses for the calendar quarter by dividing the total amount of such expenses by the number of days in that calendar quarter.
(ii) Allocating the daily amount of the allocable investment expenses to the pass-through interest holder in proportion to its respective holdings on that day, and
(iii) Totaling the interest holder's daily amounts of allocable investment expenses for the calendar quarter.
(2) Other holders taken into account For purposes of of this section, a pass-through interest holder's proportionate share of the daily amount of the allocable investment expenses is determined by taking into account all holders of residual interests in the REMIC, whether or not pass-through interest holders.
(3) Single-class REMIC
(i) Daily allocation In lieu of the allocation specified in of this section, a single-class REMIC (as described in of this section) shall allocate the daily amount of the allocable investment expenses to each pass-through interest holder in proportion to the amount of income accruing to the holder with respect to its interest in the REMIC on that day.
(ii) Other holders taken into account For purposes of of this section, the amount of the allocable investment expenses that is allocated on any day to each pass-through interest holder shall be determined by multiplying the daily amount of allocable investment expenses (determined pursuant to of this section) by a fraction, the numerator of which is equal to the amount of income that accrues (but not less than zero) to the pass-through interest holder on that day and the denominator of which is the total amount of income (as determined under of this section) that accrues to all regular and residual interest holders, whether or not pass-through interest holders, on that day.
(iii) Total income accruing The total amount of income that accrues to all regular and residual interest holders is the sum of—
(A) The amount includible under section in the gross income (but not less than zero) of the regular interest holders, and
(B) The amount of REMIC taxable income (but not less than zero) taken into account under section by the residual interest holders.
(4) Dates of purchase and disposition For purposes of this section, a pass-through interest holder holds an interest on the date of its purchase but not on the date of its disposition.
(d) Example The provisions of this section may be illustrated by the following example:
Example.
(i) During the calendar quarter ending March 31, 1989, REMIC X, which is not a single-class REMIC, incurs $900 of allocable investment expenses. At the beginning of the calendar quarter, X has 4 residual interest holders, who hold equal proportionate shares, and 10 regular interest holders. The residual interest holders, all of whom have calendar-year taxable years, are as follows:
A, an individual,
C, a C corporation that is a nominee for individual I.
S, an S corporation, and
M, a C corporation that is not a nominee.
(ii) Except for A, all of the residual interest holders hold their interests in X for the entire calendar quarter. On January 31, 1989, A sells his interest to S. Thus, for the first month of the calendar quarter, each residual interest holder holds a 25 percent interest (100%/4 interest holders) in X. For the last two months, S's holding is increased to 50 percent and A's holding is decreased to zero. The daily amount of allocable investment expenses for the calendar quarter is $10 ($900/90 days).
(iii) The amount of allocable investment expenses apportioned to the residual interest holders is as follows:
(A) $75 ($10 × 25% × 30 days) is allocated to A for the 30 days that A holds an interest in X during the calendar quarter. A includes $75 in gross income in calendar year 1989. The amount of A's expenses described in section is increased by $75 in calendar year 1989. A's deduction under section (including the $75 amount of the allocation) is subject to the limitations contained in section .
(B) $225 ($10 × 25% × 90 days) is allocated to C. Because C is a nominee for I, C does not include $225 in gross income or increase its deductible expenses by $225. Instead, I includes $225 in gross income in calendar year 1989, her taxable year. The amount of I's expenses described in section is increased by $225. I's deduction under section (including the $225 amount of the allocation) is subject to the limitations contained in section .
(C) $375 (($10 × 25% × 30 days) + ($10 × 50% × 60 days)) is allocated to S. S includes in gross income $375 of allocable investment expenses in calendar year 1989. The amount of S's expenses described in section for that taxable year is increased by $375. S allocates the $375 to its shareholders in accordance with the rules described in sections and in calendar year 1989. Thus, each shareholder of S includes its pro rata share of the $375 in gross income in its taxable year in which or with which calendar year 1989 ends. The amount of each shareholder's expenses described in section is increased by the amount of the shareholder's allocation for the shareholder's taxable year in which or with which calendar year 1989 ends. The shareholder's deduction under section (including the allocation under this section) is subject to the limitations contained in section .
(D) No amount is allocated to M. However, M's interest is taken into account for purposes of determining the proportionate share of those residual interest holders to whom an allocation is required to be made.
(iv) No allocation is made to the 10 regular interest holders pursuant to of this section. In addition, the interests held by these interest holders are not taken into account for purposes of determining the proportionate share of the residual interest holders to whom an allocation is required to be made.
(e) Allocable investment expenses not subject to backup withholding The amount of allocable investment expenses required to be allocated to a pass-through interest holder pursuant to of this section is not subject to backup withholding under section .
(f) Notice to pass-through interest holders
(1) Information required A REMIC must provide to each pass-through interest holder to which an allocation of allocable investment expense is required to be made under of this section notice of the following—
(i) If, pursuant to or of this section, notice is provided for a calendar quarter, the aggregate amount of expenses paid or accrued during the calendar quarter for which the REMIC is allowed a deduction under section ;
(ii) If, pursuant to of this section, notice is provided to a regular interest holder for a calendar year, the aggregate amount of expenses paid or accrued during each calendar quarter that the regular interest holder held the regular interest in the calendar year and for which the REMIC is allowed a deduction under section ; and
(iii) The proportionate share of these expenses allocated to that pass-through interest holder, as determined under of this section.
(2) Statement to be furnished
(i) To residual interest holder For each calendar quarter, a REMIC shall provide to each pass-through interest holder who holds a residual interest during the calendar quarter the notice required under of this section on Schedule Q (Form 1066), as required in .
(ii) To regular interest holder
(A) In general For each calendar year, a single-class REMIC (as described in of this section) must provide to each pass-through interest holder who held a regular interest during the calendar year the notice required under of this section. Quarterly reporting is not required. The information required to be included in the notice may be separately stated on the statement described in instead of on a separate statement provided in a separate mailing. See . The separate statement provided in a separate mailing must be furnished to each pass-through interest holder no later than the last day of the month following the close of the calendar year.
(B) Special rule for 1987 The information required under of this section for any calendar quarter of 1987 shall be mailed (or otherwise delivered) to each pass-through interest holder who holds a regular interest during that calendar quarter no later than March 28, 1988.
(3) Returns to the Internal Revenue Service
(i) With respect to residual interest holders Any REMIC required under and of this section to furnish information to any pass-through interest holder who holds a residual interest shall also furnish such information to the Internal Revenue Service as required in .
(ii) With respect to regular interest holders A single-class REMIC (as described in of this section) shall make an information return on Form 1099 for each calendar year beginning after December 31, 1987, with respect to each pass-through interest holder who holds a regular interest to which an allocation of allocable investment expenses is required to be made pursuant to and of this section. The preceding sentence applies with respect to a holder for a calendar year only if the REMIC is required to make an information return to the Internal Revenue Service with respect to that holder for that year pursuant to section and (or would be required to make an information return but for the $10 threshold described in section and ). The REMIC shall state on the information return—
(A) The sum of—
(1) The aggregate amounts includible in gross income as interest (as defined in and ), for the calendar year, and
(2) The sum of the amount of allocable investment expenses required to be allocated to the pass-through interest holder for each calendar quarter during the calendar year pursuant to of this section, and
(B) Any other information specified by the form or its instructions.
(4) Interest held by nominees and other specified persons
(i) Pass-through interest holder's interest held by a nominee If a pass-through interest holder's interest in a REMIC is held in the name of a nominee, the REMIC may make the information return described in and of this section with respect to the nominee in lieu of the pass-through interest holder and may provide the written statement described in and of this section to that nominee in lieu of the pass-through interest holder.
(ii) Regular interests in a single-class REMIC held by certain persons For calendar quarters and calendar years after December 31, 1991, if a person specified in holds a regular interest in a single-class REMIC (as described in of this section), then the single-class REMIC must provide the information described in and and of this section to that person with the information specified in as required in .
(5) Nominee reporting
(i) In general In any case in which a REMIC provides information pursuant to of this section to a nominee of a pass-through interest holder for a calendar quarter or, as provided in of this section, for a calendar year—
(A) The nominee shall furnish each pass-through interest holder with a written statement described in or of this section, whichever is applicable, showing the information described in of this section, and
(B) If—
(1) The nominee is a nominee for a pass-through interest holder who holds a regular interest in a single-class REMIC (as described in of this section), and
(2) The nominee is required to make an information return pursuant to section and and (or would be required to make an information return but for the $10 threshold described in section and ) with respect to the pass-through interest holder,
the nominee shall make an information return on Form 1099 for each calendar year beginning after December 31, 1987, with respect to the pass-through interest holder and state on this information return the information described in and of this section.
(ii) Time for furnishing statement The statement required by of this section to be furnished by a nominee to a pass-through interest holder for a calendar quarter or calendar year shall be furnished to this holder no later than 30 days after receiving the written statement described in or of this section from the REMIC. If, however, pursuant to of this section, the information is separately stated on the statement described in , then the information must be furnished to the pass-through interest holder in the time specified in .
(6) Special rules
(i) Time and place for furnishing returns The returns required by and of this section for any calendar year shall be filed at the time and place that a return required under section and is required to be filed. See and .
(ii) Duplicative returns not required The requirements of and of this section for the making of an information return shall be met by the timely filing of an information return pursuant to section and that contains the information required by of this section.
[T.D. 8186, 53 FR 7507, Mar. 9, 1988, as amended by T.D. 8366, 56 FR 49515, Sept. 30, 1991]