U.S. Code, Title 26, Internal Revenue Code

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Author: "U.S. Congress, Office of the Law Revision Counsel"

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§ 860l. Definitions and Other Special Rules

(a) FASIT

(1) In general

     For purposes of this title, the terms "financial asset securitization investment trust" and "FASIT" mean any entity—

     (A) for which an election to be treated as a FASIT applies for the taxable year,

     (B) all of the interests in which are regular interests or the ownership interest,

     (C) which has only one ownership interest and such ownership interest is held directly by an eligible corporation,

     (D) as of the close of the third month beginning after the day of its formation and at all times thereafter, substantially all of the assets of which (including assets treated as held by the entity under section 860I(b)(2)) consist of permitted assets, and

     (E) which is not described in section 851(a).

A rule similar to the rule of the last sentence of section 860D(a) shall apply for purposes of this paragraph.

(2) Eligible corporation

     For purposes of paragraph (1)(C), the term "eligible corporation" means any domestic C corporation other than—

     (A) a corporation which is exempt from, or is not subject to, tax under this chapter,

     (B) an entity described in section 851(a) or 856(a),

     (C) a REMIC, and

     (D) an organization to which part I of subchapter T applies.

(3) Election

     An entity (otherwise meeting the requirements of paragraph (1)) may elect to be treated as a FASIT. Except as provided in paragraph (5), such an election shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.

(4) Termination

     If any entity ceases to be a FASIT at any time during the taxable year, such entity shall not be treated as a FASIT after the date of such cessation.

(5) Inadvertent terminations, etc.

     Rules similar to the rules of section 860D(b)(2)(B) shall apply to inadvertent failures to qualify or remain qualified as a FASIT.

(6) Permitted assets not treated as interest in FASIT

     Except as provided in regulations prescribed by the Secretary, any asset which is a permitted asset at the time acquired by a FASIT shall not be treated at any time as an interest in such FASIT.

(b) Interests in FASIT

     For purposes of this part—

(1) Regular interest

(A) In general

     The term "regular interest" means any interest which is issued by a FASIT on or after the startup date with fixed terms and which is designated as a regular interest if—

     (i) such interest unconditionally entitles the holder to receive a specified principal amount (or other similar amount),

     (ii) interest payments (or other similar amounts), if any, with respect to such interest are determined based on a fixed rate, or, except as otherwise provided by the Secretary, at a variable rate permitted under section 860G(a)(1)(B)(i),

     (iii) such interest does not have a stated maturity (including options to renew) greater than 30 years (or such longer period as may be permitted by regulations),

     (iv) the issue price of such interest does not exceed 125 percent of its stated principal amount, and

     (v) the yield to maturity on such interest is less than the sum determined under section 163(i)(1)(B) with respect to such interest.

An interest shall not fail to meet the requirements of clause (i) merely because the timing (but not the amount) of the principal payments (or other similar amounts) may be contingent on the extent that payments on debt instruments held by the FASIT are made in advance of anticipated payments and on the amount of income from permitted assets.

(B) High-yield interests

(i) In general

     The term "regular interest" includes any high-yield interest.

(ii) High-yield interest

     The term "high-yield interest" means any interest which would be described in subparagraph (A) but for—

(I) failing to meet the requirements of one or more of clauses (i), (iv), or (v) thereof, or

(II) failing to meet the requirement of clause (ii) thereof but only if interest payments (or other similar amounts), if any, with respect to such interest consist of a specified portion of the interest payments on permitted assets and such portion does not vary during the period such interest is outstanding.

(2) Ownership interest

     The term "ownership interest" means the interest issued by a FASIT after the startup day which is designated as an ownership interest and which is not a regular interest.

(c) Permitted assets

     For purposes of this part—

(1) In general

     The term "permitted asset" means—

     (A) cash or cash equivalents,

     (B) any debt instrument (as defined in section 1275(a)(1)) under which interest payments (or other similar amounts), if any, at or before maturity meet the requirements applicable under clause (i) or (ii) of section 860G(a)(1)(B),

     (C) foreclosure property,

     (D) any asset—

     (i) which is an interest rate or foreign currency notional principal contract, letter of credit, insurance, guarantee against payment defaults, or other similar instrument permitted by the Secretary, and

     (ii) which is reasonably required to guarantee or hedge against the FASIT’s risks associated with being the obligor on interests issued by the FASIT,

     (E) contract rights to acquire debt instruments described in subparagraph (B) or assets described in subparagraph (D),

     (F) any regular interest in another FASIT, and

     (G) any regular interest in a REMIC.

(2) Debt issued by holder of ownership interest not permitted asset

     The term "permitted asset" shall not include any debt instrument issued by the holder of the ownership interest in the FASIT or by any person related to such holder or any direct or indirect interest in such a debt instrument. The preceding sentence shall not apply to cash equivalents and to any other investment specified in regulations prescribed by the Secretary.

(3) Foreclosure property

(A) In general

     The term "foreclosure property" means property—

     (i) which would be foreclosure property under section 856(e) (determined without regard to paragraph (5) thereof) if such property were real property acquired by a real estate investment trust, and

     (ii) which is acquired in connection with the default or imminent default of a debt instrument held by the FASIT unless the security interest in such property was created for the principal purpose of permitting the FASIT to invest in such property.

Solely for purposes of subsection (a)(1), the determination of whether any property is foreclosure property shall be made without regard to section 856(e)(4).

(B) Authority to reduce grace period

     In the case of property other than real property and other than personal property incident to real property, the Secretary may by regulation reduce for purposes of subparagraph (A) the periods otherwise applicable under paragraphs (2) and (3) of section 856(e).

(d) Startup day

     For purposes of this part—

(1) In general

     The term "startup day" means the date designated in the election under subsection (a)(3) as the startup day of the FASIT. Such day shall be the beginning of the first taxable year of the FASIT.

(2) Treatment of property held on startup day

     All property held (or treated as held under section 860I(b)(2)) by an entity as of the startup day shall be treated as contributed to such entity on such day by the holder of the ownership interest in such entity.

(e) Tax on prohibited transactions

(1) In general

     There is hereby imposed for each taxable year of a FASIT a tax equal to 100 percent of the net income derived from prohibited transactions. Such tax shall be paid by the holder of the ownership interest in the FASIT.

(2) Prohibited transactions

     For purposes of this part, the term "prohibited transaction" means—

     (A) except as provided in paragraph (3), the receipt of any income derived from any asset that is not a permitted asset,

     (B) except as provided in paragraph (3), the disposition of any permitted asset other than foreclosure property,

     (C) the receipt of any income derived from any loan originated by the FASIT, and

     (D) the receipt of any income representing a fee or other compensation for services (other than any fee received as compensation for a waiver, amendment, or consent under permitted assets (other than foreclosure property) held by the FASIT).

(3) Exception for income from certain dispositions

(A) In general

     Paragraph (2)(B) shall not apply to a disposition which would not be a prohibited transaction (as defined in section 860F(a)(2)) by reason of—

     (i) clause (ii), (iii), or (iv) of section 860F(a)(2)(A), or

     (ii) section 860F(a)(5),

if the FASIT were treated as a REMIC and permitted assets (other than cash or cash equivalents) were treated as qualified mortgages.

(B) Substitution of debt instruments; reduction of over-collateralization

     Paragraph (2)(B) shall not apply to—

     (i) the substitution of a debt instrument described in subsection (c)(1)(B) for another debt instrument which is a permitted asset, or

     (ii) the distribution of a debt instrument contributed by the holder of the ownership interest to such holder in order to reduce over-collateralization of the FASIT,

but only if a principal purpose of acquiring the debt instrument which is disposed of was not the recognition of gain (or the reduction of a loss) as a result of an increase in the market value of the debt instrument after its acquisition by the FASIT.

(C) Liquidation of class of regular interests

     Paragraph (2)(B) shall not apply to the complete liquidation of any class of regular interests.

(D) Income from dispositions of former hedge assets

     Paragraph (2)(A) shall not apply to income derived from the disposition of—

     (i) an asset which was described in subsection (c)(1)(D) when first acquired by the FASIT but on the date of such disposition was no longer described in subsection (c)(1)(D)(ii), or

     (ii) a contract right to acquire an asset described in clause (i).

(4) Net income

     For purposes of this subsection, net income shall be determined in accordance with section 860F(a)(3).

(f) Coordination with other provisions

(1) Wash sales rules

     Rules similar to the rules of section 860F(d) shall apply to the ownership interest in a FASIT.

(2) Section 475

     Except as provided by the Secretary by regulations, if any security which is sold or contributed to a FASIT by the holder of the ownership interest in such FASIT was required to be marked-to-market under section 475 by such holder, section 475 shall continue to apply to such security; except that in applying section 475 while such security is held by the FASIT, the fair market value of such security for purposes of section 475 shall not be less than its value under section 860I(d).

(g) Related person

     For purposes of this part, a person (hereinafter in this subsection referred to as the "related person") is related to any person if—

     (1) the related person bears a relationship to such person specified in section 267(b) or section 707(b)(1), or

     (2) the related person and such person are engaged in trades or businesses under common control (within the meaning of subsections (a) and (b) of section 52).

For purposes of paragraph (1), in applying section 267(b) or 707(b)(1), "20 percent" shall be substituted for "50 percent".

(h) Regulations

     The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this part, including regulations to prevent the abuse of the purposes of this part through transactions which are not primarily related to securitization of debt instruments by a FASIT.

(Added Pub. L. 104–188, title I, § 1621(a), Aug. 20, 1996, 110 Stat. 1862; amended Pub. L. 105–34, title XVI, § 1601(f)(6), Aug. 5, 1997, 111 Stat. 1091.)

Amendments

     1997—Subsec. (b)(1)(A). Pub. L. 105–34, § 1601(f)(6)(A), substituted "on or after the startup date" for "after the startup date" in introductory provisions.

     Subsec. (d)(2). Pub. L. 105–34, § 1601(f)(6)(B), substituted "section 860I(b)(2)" for "section 860I(c)(2)".

     Subsec. (e)(2)(A). Pub. L. 105–34, § 1601(f)(6)(E)(ii), inserted "except as provided in paragraph (3)," before "the receipt".

     Subsec. (e)(2)(B). Pub. L. 105–34, § 1601(f)(6)(C), inserted "other than foreclosure property" after "any permitted asset".

     Subsec. (e)(3)(A). Pub. L. 105–34, § 1601(f)(6)(D), struck out "if the FASIT were treated as a REMIC and debt instruments described in subsection (c)(1)(B) were treated as qualified mortgages." after "section 860F(a)(5)," in cl. (ii) and inserted concluding provisions "if the FASIT were treated as a REMIC and permitted assets (other than cash or cash equivalents) were treated as qualified mortgages."

     Subsec. (e)(3)(D). Pub. L. 105–34, § 1601(f)(6)(E)(i), added subpar. (D).

Effective Date of 1997 Amendment

     Amendment by Pub. L. 105–34 effective as if included in the provisions of the Small Business Job Protection Act of 1996, Pub. L. 104–188, to which it relates, see section 1601(j) of Pub. L. 105–34, set out as a note under section 23 of this title.

Section Referred to in Other Sections

     This section is referred to in section 860K of this title.

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Chicago: "U.S. Congress, Office of the Law Revision Counsel", "§ 860l. Definitions and Other Special Rules," U.S. Code, Title 26, Internal Revenue Code in U.S. Code, Title 26, Internal Revenue Code (Washington, D.C.: Government Printing Office, 2002), Original Sources, accessed May 29, 2024, http://www.originalsources.com/Document.aspx?DocID=UI6D1FGU6DSRZ9Q.

MLA: "U.S. Congress, Office of the Law Revision Counsel". "§ 860l. Definitions and Other Special Rules." U.S. Code, Title 26, Internal Revenue Code, in U.S. Code, Title 26, Internal Revenue Code, Washington, D.C., Government Printing Office, 2002, Original Sources. 29 May. 2024. http://www.originalsources.com/Document.aspx?DocID=UI6D1FGU6DSRZ9Q.

Harvard: "U.S. Congress, Office of the Law Revision Counsel", '§ 860l. Definitions and Other Special Rules' in U.S. Code, Title 26, Internal Revenue Code. cited in 2002, U.S. Code, Title 26, Internal Revenue Code, Government Printing Office, Washington, D.C.. Original Sources, retrieved 29 May 2024, from http://www.originalsources.com/Document.aspx?DocID=UI6D1FGU6DSRZ9Q.