Final_TD8571

[Federal Register: December 8, 1994]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8571]
RIN 1545-AO57

Reporting Requirements for Recipients of Points Paid on
Residential Mortgages

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations setting forth the
information reporting requirements for recipients of prepaid interest
in the form of points (points) paid on residential mortgages. The
regulations implement amendments made by the Omnibus Budget
Reconciliation Act of 1989. The regulations affect any taxpayer that,
in the course of a trade or business, receives $600 or more of
interest, including points, in a calendar year on a residential
mortgage.

DATES: These regulations are effective December 8, 1994.
These regulations are applicable for mortgage interest received
after December 31, 1987. However, the reporting requirements of
Sec. 1.6050H-1 of the regulations do not apply to prepaid interest in
the form of points received before January 1, 1995.

FOR FURTHER INFORMATION CONTACT: James L. Atkinson, (202) 622- 4950
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations
have been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h))
under control number 1545-1380. The estimated annual burden per
respondent/recordkeeper varies from two hours to thirty-five hours,
depending on individual circumstances, with an estimated average of ten
hours.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP,
Washington, DC 20224, and to the Office of Management and Budget, Attn:
Desk Officer for the Department of the Treasury, Office of Information
and Regulatory Affairs, Washington, DC 20503.

Background

On December 31, 1992, the IRS published in the Federal Register a
notice of proposed rulemaking (57 FR 62526) proposing amendments to the
Income Tax Regulations (26 CFR part 1) under section 6050H of the
Internal Revenue Code of 1986 (Code). These amendments were proposed to
implement section 7646 of the Omnibus Budget Reconciliation Act of
1989, Pub. L. 101-239, 103 Stat. 2106 (the 1989 Act).
Written comments responding to the notice of proposed rulemaking
were received. No public hearing was requested or held. After
consideration of all the comments, the proposed regulations under
section 6050H are adopted as revised by this Treasury decision. The
comments made on the proposed regulations and the revisions
incorporated in the final regulations are discussed below.

Explanation of Revisions and Summary of Comments in General

Section 6050H provides that an information return must be made by
any person who is engaged in a trade or business and who, in the course
of that trade or business, receives from any individual $600 or more of
interest on any mortgage in a calendar year. Any person required to
make an information return under section 6050H also must furnish a
statement to the payor of record on or before January 31 of the year
following the calendar year in which the interest was received.
Section 6050H(b)(2) was amended by the 1989 Act to require persons
subject to the information reporting requirements of section 6050H to
separately state the amount of points and the amount of interest (other
than points) received from an individual on a mortgage during a
calendar year. Section 6050H(d)(2) requires persons subject to the
information reporting requirements to provide to the individual from
whom the interest and points were received a statement separately
stating the amount of points and the amount of interest (other than
points) received on the mortgage during the calendar year.
On April 12, 1988, the IRS issued final regulations (TD 8191, (53
FR 12002)) regarding the application of section 6050H to amounts
received as interest (other than points). The final regulations
contained in this Treasury decision supplement the existing regulations
by providing guidance as to the application of section 6050H to points
received from an individual during a calendar year.
On December 29, 1993, the IRS issued final regulations (TD 8507,
(58 FR 68751)) regarding the application of section 6050H to
reimbursements of interest paid in connection with a qualified
mortgage. The final regulations contained in this Treasury decision
preserve all substantive changes made to Sec. 1.6050H-2 by TD 8507,
including changes made to the language of Sec. 1.6050H-2(a)(2)(iv)
(renumbered as Sec. 1.6050H-2(a)(2)(v) by the final regulations). Apart
from the renumbering of various provisions, the final regulations do
not affect the language of the regulatory provisions adopted by TD
8507. A complete discussion of TD 8507 may be found in the preamble to
that Treasury decision.
At the request of commentators, the IRS is considering the issuance
of guidance providing uniform procedures for requesting extensions of
time within which to file information returns with the IRS and related
statements to taxpayers. This guidance, if issued, would apply to the
information reporting requirements set forth in this Treasury decision.

Significant Provisions of and Changes Made by the Final Regulations

A. Definition of Points

A number of commentators submitted suggestions regarding the proper
definition of prepaid interest in the form of points. These suggestions
and other significant provisions are summarized below.
1. Seller-Paid Points
The final regulations require the reporting of points that are paid
by the seller of a principal residence on behalf of the borrower (i.e.,
seller-paid points). For this purpose, seller-paid points are treated
as paid by the seller to the payor of record and then paid directly by
the payor of record to the interest recipient.
One commentator suggested that seller-paid points should not be
deductible by a borrower, and as a result, should not be reported by an
interest recipient. Consistent with the provisions of Sec. 1.1273-
2(g)(4) (pertaining to original issue discount), however, the IRS
published Rev. Proc. 94-27, 1994-1 C.B. 613, on April 11, 1994,
permitting borrowers to treat seller-paid points as amounts that are
deductible under section 461(g)(2) of the Code. In order to promote
consistency with this treatment, the final regulations require the
reporting of seller-paid points on Form 1098.
2. Loan Origination Fees
The regulations apply equally to amounts designated as points
payable in connection with any residential loan, regardless of whether
the loan is a conventional loan, or is insured or guaranteed by the
Federal Housing Administration (FHA) or the Department of Veterans
Affairs (VA). Amounts paid in connection with either a VA or an FHA
loan that would not be reportable if paid in connection with a
conventional loan, however, continue to be nonreportable (for example,
a VA funding fee).
3. Home Improvement Loans
Commentators also suggested that the regulations be modified to
reflect the statutory language of section 461(g)(2) of the Code,
permitting a deduction for points paid in connection with indebtedness
incurred for either the purchase or the improvement of the taxpayer's
principal residence. The final regulations continue to exclude from the
definition of reportable points amounts paid in respect of indebtedness
incurred for the improvement of the taxpayer's principal residence.
This limitation is designed to alleviate the need for lenders to
ascertain that the disbursed funds actually are used for the
improvement of the taxpayer's residence.
The final regulations specifically provide that the regulations
govern only the reporting of points under section 6050H of the Code,
and do not affect the borrower's ability to deduct as points any amount
that otherwise would be deductible under applicable authority. This
provision clarifies that the deductibility of amounts such as points
paid on home improvement loans are not affected by the exclusion of
such amounts from the final regulations. These points are deductible
under section 461(g)(2) provided that the taxpayer can establish by
appropriate documentation that the points were paid for the improvement
of the residence and that the requirements of section 163(h)(3) are
otherwise satisfied.
4. Land Contracts
One commentator requested clarification regarding application of
the regulations to the refinancing of a land contract (or land sale
contract, contract for deed, or similar forms of seller financing). In
a land contract between two individuals, legal title to the property is
not granted to the buyer until the land contract is paid in full.
For tax purposes, the land contract generally constitutes a
completed sale upon the transfer to the buyer of the benefits and
burdens of ownership. Accordingly, subsequent indebtedness incurred to
extinguish the outstanding balance of the amount due the seller
constitutes a refinancing of the acquisition debt rather than the
purchase of the residence. Accordingly, the final regulations have been
revised to clarify that points paid in connection with the refinancing
of land contracts and similar forms of seller-financed transactions
must not be reported on Form 1098 because only points paid on the
acquisition of the residence are reportable under the regulations.

B. Designation Agreement

The proposed regulations permit an interest recipient to enter into
a designation agreement with a qualified person, pursuant to which the
qualified person will assume responsibility for fulfilling the
reporting responsibilities of the interest recipient. In general, the
proposed regulations provide that a qualified person is either (i) a
trade or business with respect to which the interest recipient is under
common control within the meaning of Sec. 1.414(c)-2, or (ii) a person
who is named as the designee by the lender of record or by another
qualified person in a designation agreement, and who either was
involved in the original loan transaction or is a subsequent purchaser
of the loan.
1. Qualified Person
One commentator suggested that the definition of qualified person
be expanded to include closing attorneys and settlement agents. The
commentator suggested that closing attorneys and settlement agents are
in the best position to determine the extent to which points should be
reported on Form 1098.
Neither closing attorneys nor settlement agents are suited to
fulfill the continuing, annual reporting on Form 1098 of interest
(other than points) paid on the mortgage. Because it is undesirable to
separate the responsibility for reporting points from the
responsibility for reporting interest (other than points), neither
closing attorneys nor settlement agents have been added to the list of
qualified persons.
It also was suggested that the definition of qualified persons be
clarified to include mortgage servicers. In many cases, the mortgage
lender will assign responsibility for servicing the mortgage, including
applicable reporting responsibility, to a mortgage servicer that is a
subsidiary of either the lender or the lender's parent corporation. The
final regulations retain the existing definition of a qualified person
for purposes of reporting interest (other than points). Thus, to the
extent mortgage servicing corporations presently are able to comply
with the provisions governing the reporting of interest (other than
points), these corporations likewise should be able to comply with
those requirements with respect to the reporting of points.
2. Incorporation Into Section 6045
One commentator suggested that the proposed regulations be amended
to permit incorporation of the designation agreement into the
designation agreement already permitted in the regulations under Code
section 6045 on the sale or exchange of reportable real estate (see
Sec. 1.6045-4(e)(5)). The commentator suggested that this consolidation
would eliminate the need for two separate designation agreements for a
single mortgage loan closing.
After careful consideration, the IRS has rejected this suggestion.
The reporting provisions of the two sections serve different purposes
and involve the collection of different types of information. (Compare
Sec. 1.6045-4(h)(1) with Sec. 1.6050H-2(a)(2).) Moreover, the parties
that are required to report under section 6045 and section 6050H, even
with respect to the same transaction, generally are not identical.
Thus, in most cases, each reporting person would be required to execute
separate designation agreements. As a result of the fundamental
incompatibility of the two reporting provisions, the final regulations
retain the definition of qualified person contained in the proposed
regulations.

C. Construction Loans

The regulations also provide guidance regarding the reporting of
points paid on a loan incurred for the construction of a principal
residence. Under the regulations, a loan incurred for the construction
of a principal residence, as well as a permanent (i.e., take-out) loan
incurred to refinance the construction loan, are each considered
indebtedness incurred in connection with the purchase of a principal
residence. Because no comments were received regarding the treatment of
construction loans, the final regulations adopt the language of the
proposed regulations without change.

D. $600 Reporting Threshold

The current reporting regulations require an interest recipient
that receives at least $600 of interest on a qualified mortgage for a
calendar year to comply with the reporting requirements of the
regulations. The proposed regulations clarify that for purposes of
determining whether this $600 reporting threshold has been met,
interest includes prepaid interest in the form of points. Commentators
suggested that the computation required by this provision would be
administratively burdensome for lenders of record.
The Service believes that the additional burden that this
computation will place on lenders will be minimal, while the benefits
to borrowers will be tangible. Accordingly, the final regulations adopt
the language of the proposed regulations without change.

E. Effective Date

The proposed regulations indicate that the reporting requirements
set forth therein are to be effective for prepaid interest in the form
of points received after December 31, 1993. These final regulations
modify this effective date to provide that the reporting requirements
with respect to points are not effective for points paid before January
1, 1995. For guidance on the application of section 6050H to points
received after 1990 and before 1995, see Notice 90-70, 1990-2 C.B. 351;
Rev. Proc. 92-11, 1992-1 C.B. 662; Rev. Rul. 92-2, 1992-1 C.B. 360; and
Rev. Proc. 94-27, 1994-1 C.B. 613.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding these regulations was
submitted to the Small Business Administration for comment on its
impact on small business.

Drafting Information: The principal author of these regulations
is James L. Atkinson, Office of Assistant Chief Counsel (Income Tax
and Accounting), IRS. However, other personnel from the IRS and
Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended in part
by adding a new section authority to read as follows:

Authority: 26 U.S.C. 7805 * * *.

Section 1.6050H-1 also issued under 26 U.S.C. 6050H. * * *
Par. 2. Section 1.6050H-0 is revised to read as follows:

Sec. 1.6050H-0 Table of contents.

This section lists the major captions that appear in Secs. 1.6050H-
1 and 1.6050H-2.

Sec. 1.6050H-1 Information reporting of mortgage interest received in
a trade or business from an individual.

(a) Information reporting requirement.
(1) Overview.
(2) Reporting requirement.
(3) Optional reporting.
(b) Qualified mortgage.
(1) In general.
(2) Mortgage.
(i) In general.
(ii) Transitional rule for certain obligations existing on
December 31, 1984.
(iii) Transitional rule for certain obligations existing on
December 31, 1987.
(3) Payor of record.
(4) Lender of record.
(c) Interest recipient.
(1) Trade or business requirement.
(2) Interest received or collected on behalf of another person.
(i) General rule.
(ii) Exception.
(3) Interest received in the form of points.
(i) In general.
(ii) If designation agreement is in effect.
(4) Governmental unit.
(5) Examples.
(d) Additional rules.
(1) Reporting by foreign person.
(2) Reporting with respect to nonresident alien individual.
(i) In general.
(ii) Nonresident alien individual status.
(3) Reporting by cooperative housing corporations.
(e) Amount of interest received on mortgage for calendar year.
(1) In general.
(2) Calendar year.
(i) In general.
(ii) De minimis rule.
(iii) Applicability to points.
(3) Certain interest not received on mortgage.
(i) Interest received from seller on payor of record's mortgage.
(ii) Interest received from governmental unit.
(4) Interest calculated under Rule of 78s method of accounting.
(f) Points treated as interest.
(1) General rule.
(2) Limitations.
(3) Special rule.
(i) Amounts paid directly by payor of record.
(ii) Examples.
(4) Construction loans.
(i) In general.
(ii) Limitation on refinancing of construction loans.
(5) Amounts paid to mortgage brokers.
(6) Effect on deduction of points.
(g) Effective date.
(1) In general.
(2) Points.

Sec. 1.6050H-2 Time, form, and manner of reporting interest received
on qualified mortgage.

(a) Requirement to file return.
(1) Form of return.
(2) Information included on return.
(3) Reimbursements of interest on a qualified mortgage.
(4) Time and place for filing return.
(5) Use of magnetic media.
(b) Requirement to furnish statement.
(1) In general.
(2) Information included on statement.
(3) Statement furnished pursuant to Federal mortgage program.
(4) Copy of Form 1098 to payor of record.
(5) Furnishing statement with other information reports.
(6) Time and place for furnishing statement.
(c) Notice requirement for use of Rule of 78s method of
accounting.
(1) In general.
(2) Time and manner.
(d) Reporting under designation agreement.
(1) In general.
(2) Qualified person.
(3) Designation agreement.
(4) Penalties.
(e) Penalty provisions.
(1) Returns and statements the due date for which (determined
without regard for extensions) is after December 31, 1987, and
before December 31, 1989.
(i) Failure to file return or to furnish statement.
(ii) Failure to furnish TIN.
(iii) Failure to include correct information.
(2) Returns and statements the due date for which (determined
without regard for extensions) is after December 31, 1989.
(i) Failure to file return or to furnish statement.
(ii) Failure to furnish TIN.
(iii) Failure to include correct information.
(f) Requirement to request and to obtain TIN.
(1) In general.
(2) Manner of requesting TIN.
(g) Effective date.
(1) In general.
(2) Points.

Par. 3. Section 1.6050H-1 is amended as follows:
1. Paragraph (a) is revised.
2. Paragraph (b)(4) is added.
3. Paragraph (c) is amended as follows:
a. Paragraphs (c) (1) and (2) are revised.
b. Paragraph (c)(3) is redesignated as paragraph (c)(5) and Example
(5) is added.
c. New paragraph (c)(3) is added.
4. Paragraph (e) is amended as follows:
a. Paragraphs (e)(1) and (e)(2)(i) are revised.
b. Paragraph (e)(2)(iii) is added.
5. Paragraph (f) is added.
6. Paragraph (g) is revised.
The added and revised provisions read as follows:

Sec. 1.6050H-1 Information reporting of mortgage interest received in
a trade or business from an individual.

(a) Information reporting requirement--(1) Overview. The
information reporting requirements of section 6050H, this section, and
Sec. 1.6050H-2 apply to an interest recipient who receives at least
$600 of interest on a qualified mortgage for a calendar year or who
makes a reimbursement of interest described in Sec. 1.6050H-
2(a)(2)(iv). Paragraph (b) of this section defines qualified mortgage.
Paragraph (c) of this section defines interest recipient. Paragraph (d)
of this section contains additional rules relating to the reporting
requirement for foreign persons, cooperative housing corporations, and
nonresident alien individuals. Paragraph (e) of this section contains
rules for determining the amount of interest received on a mortgage for
a calendar year. Paragraph (f) of this section provides rules for
determining when prepaid interest in the form of points is taken into
account as interest for purposes of section 6050H, this section, and
Sec. 1.6050H-2.
(2) Reporting requirement. Except as otherwise provided in this
section and Sec. 1.6050H-2, an interest recipient that either receives
at least $600 of interest on a qualified mortgage for a calendar year
or makes reimbursements of interest described in Sec. 1.6050H-
2(a)(2)(iv) must, with respect to that interest--
(i) File an information return with the Internal Revenue Service;
and
(ii) Furnish a statement to the payor of record on the mortgage.
(3) Optional reporting. An interest recipient may, but is not
required to, report its receipt of less than $600 of interest on a
qualified mortgage for a calendar year. Similarly, an interest
recipient also may report reimbursements of interest on a qualified
mortgage even if the reimbursements are not required to be reported by
Sec. 1.6050H-2(a)(2)(iv). An interest recipient that chooses, but is
not required, to file a return as provided in this section and
Sec. 1.6050H-2(a) or to furnish a statement as provided in this section
and Sec. 1.6050H-2(b) is subject to the requirements of this section
and Sec. 1.6050H-2.
(b) * * *
(4) Lender of record. The lender of record is the person who, at
the time the loan is made, is named as the lender on the loan documents
and whose right to receive payment from the payor of record is secured
by the payor of record's principal residence. An intention by the
lender of record to sell or otherwise transfer the loan to a third
party subsequent to the close of the transaction will not affect the
determination of who is the lender of record.
(c) Interest recipient--(1) Trade or business requirement. Except
as provided in paragraph (c)(4) of this section, an interest recipient
is a person that is engaged in a trade or business (whether or not the
trade or business of lending money) and that, in the course of the
trade or business, either receives interest on a mortgage or makes a
reimbursement of interest on a qualified mortgage described in
Sec. 1.6050H-2(a)(3). For purposes of this paragraph (c)(1), if a
person holds a mortgage which was originated or acquired in the course
of a trade or business, the interest on the mortgage is considered to
be received in the course of that trade or business. For example, if
real estate developer A lends money to individual B to enable B to
purchase a house in a subdivision owned and developed by A, and B gives
a mortgage to A for the loan, A is an interest recipient for interest
received on the mortgage. Alternatively, if C, a person engaged in the
trade or business of being a physician, lends money to individual D to
enable D to purchase C's home, and D gives a mortgage to C for the
loan, C is not an interest recipient for interest received on the
mortgage, because C will not receive the interest in the course of the
trade or business of being a physician.
(2) Interest received or collected on behalf of another person--(i)
General rule. Except as otherwise provided in paragraph (c)(2)(ii) or
(3) of this section, a person that, in the course of its trade or
business, receives or collects interest on a mortgage on behalf of
another person (e.g., the lender of record) is the interest recipient
(the initial recipient) for the mortgage. In this case, the reporting
requirement of paragraph (a) of this section does not apply to the
transfer of interest from the initial recipient to the person for which
the initial recipient receives or collects the interest. For example,
if financial institution A collects interest on behalf of financial
institution B, A is the initial recipient for the mortgage and is
subject to the reporting requirements of section 6050H, and B is not
required to report the interest received on the mortgage from A.
(ii) Exception--(A) Scope of exception. Paragraph (c)(2)(i) of this
section does not apply for any period for which--
(1) An initial recipient does not possess the information needed to
comply with the reporting requirement of paragraph (a) of this section;
and
(2) The person for which the interest is received or collected
would receive the interest in the course of its trade or business if
the interest were paid directly to that person. For purposes of this
paragraph (c)(2)(ii)(A)(2), if interest is received or collected on
behalf of a person other than an individual, that person is presumed to
receive interest in a trade or business.
(B) Application of exception. If the exception provided by this
paragraph (c)(2)(ii) applies, the person for which the interest is
received or collected is the interest recipient with respect to
interest received or collected on the mortgage during the period
described in this paragraph (c)(2)(ii).
(3) Interest received in the form of points. For purposes of this
section and Sec. 1.6050H-2, in the case of prepaid interest received in
the form of points (as defined in paragraph (f) of this section):
(i) In general. Except as provided in paragraph (c)(3)(ii) of this
section, only the lender of record or a qualified person (as defined in
Sec. 1.6050H-2(d)(2)) is treated as receiving the points. The lender of
record or qualified person is treated as receiving all points paid
directly by the payor of record in connection with the purchase of the
principal residence.
(ii) If designation agreement is in effect. If a designation
agreement is executed pursuant to Sec. 1.6050H-2(d) with respect to
points, only the designated party under the agreement is treated as
receiving points with respect to any mortgage to which the agreement
applies. The designated party is treated as receiving all points with
respect to any mortgage to which the agreement applies.
* * * * *
(5) * * *

Example (5). On December 1, Borrower obtains from Lender funds
with which to purchase an existing structure to be used as
Borrower's principal residence. In connection with the mortgage,
Lender charges Borrower $300 as points. Borrower pays this amount to
Lender at closing using unborrowed funds. In addition, Lender
receives from Borrower with respect to the mortgage $300 as interest
(as determined under paragraph (e) of this section) other than
points. Because Lender has received at least $600 in interest,
including points, with respect to Borrower's mortgage during the
calendar year, Lender must report the payments in accordance with
paragraph (a) of this section and Sec. 1.6050H-2. Under those
sections, Lender must separately state on the information return and
the statement to Borrower the $300 received as interest (other than
points) and the $300 received as points.
* * * * *
(e) Amount of interest received on mortgage for calendar year--(1)
In general. For purposes of this section and Sec. 1.6050H-2, interest
includes mortgage prepayment penalties and late charges other than late
charges for a specific mortgage service. Interest also includes prepaid
interest in the form of points (as defined in paragraph (f) of this
section). Whether an interest recipient receives $600 or more of
interest on a mortgage for a calendar year is determined on a mortgage-
by-mortgage basis. An interest recipient need not aggregate interest
received on all of the mortgages of a payor of record held by the
interest recipient to determine whether the $600 threshold is met.
Therefore, an interest recipient need not report interest of less than
$600 received on a mortgage, even though it receives a total of $600 or
more of interest on all of the mortgages of the payor of record for a
calendar year.
(2) Calendar year--(i) In general. Except as otherwise provided in
paragraph (e)(2)(ii) or (iii) of this section, the calendar year for
which interest is received is the later of the calendar year in which
the interest is received or the calendar year in which the interest
properly accrues.
(ii) * * *
(iii) Applicability to points. Paragraphs (e)(2)(i) and (ii) of
this section do not apply to prepaid interest in the form of points (as
defined in paragraph (f) of this section). Points (as defined in
paragraph (f) of this section) must be reported in the calendar year in
which they are received.
* * * * *
(f) Points treated as interest--(1) General rule. Subject to the
limitations of paragraph (f)(2) of this section, an amount is deemed to
be points paid in respect of indebtedness incurred in connection with
the purchase of the payor of record's principal residence (points) for
purposes of this section and Sec. 1.6050H-2 to the extent that the
amount--
(i) Is clearly designated on the Uniform Settlement Statement
prescribed under the Real Estate Settlement Procedures Act of 1974, 12
U.S.C. 2601 et seq., (e.g., the Form HUD-1) as points incurred in
connection with the indebtedness, for example as loan origination fees
(including amounts so designated on Veterans Affairs (VA) and Federal
Housing Administration (FHA) loans), loan discount, discount points, or
points;
(ii) Is computed as a percentage of the stated principal amount of
the indebtedness incurred by the payor of record;
(iii) Conforms to an established practice of charging points in the
area in which the loan is issued and does not exceed the amount
generally charged in the area;
(iv) Is paid in connection with the acquisition by the payor of
record of a residence that is the principal residence of the payor of
record and that secures the loan. For this purpose, the lender of
record may rely on a signed written statement of the payor of record
that states whether the proceeds of the loan are for the purchase of
the mortgagor's principal residence; and
(v) Is paid directly by the payor of record.
(2) Limitations. An amount is not points for purposes of this
section to the extent that the amount is--
(i) Paid in connection with indebtedness incurred for the
improvement of a principal residence;
(ii) Paid in connection with indebtedness incurred to purchase or
improve a residence that is not the payor of record's principal
residence, such as a second home, vacation property, investment
property, or trade or business property;
(iii) Paid in connection with a home equity loan or a line of
credit, even though the loan is secured by the payor of record's
principal residence;
(iv) Paid in connection with a refinancing loan (except as provided
by paragraph (f)(4) of this section), including a loan incurred to
refinance indebtedness owed by the borrower under the terms of a land
contract, a contract for deed, or similar forms of seller financing;
(v) Paid in lieu of amounts that ordinarily are stated separately
on the Form HUD-1, such as appraisal fees, inspection fees, title fees,
attorney fees, and property taxes; or
(vi) Paid in connection with the acquisition of a principal
residence, to the extent that the amount is allocable to indebtedness
in excess of the aggregate amount that may be treated as acquisition
indebtedness under section 163(h)(3)(B)(ii).
(3) Special rule--(i) Amounts paid directly by payor of record. For
purposes of this section, an amount is considered paid directly by the
payor of record if it is--
(A) Provided by the payor of record from funds that have not been
borrowed from the lender of record for this purpose as part of the
overall transaction. The amount provided may include amounts designated
as down payments, escrow deposits, earnest money applied at the
closing, and other funds actually paid over by the payor of record at
or before the time of closing; or
(B) Paid as points (within the meaning of this paragraph (f)) on
behalf of the payor of record by the seller. For this purpose, an
amount paid as points to an interest recipient by the seller on behalf
of the payor of record is treated as paid to the payor of record and
then paid directly by the payor of record to the interest recipient.
(ii) Examples. The provisions of this paragraph (f) are illustrated
by the following examples:

Example 1. Financed payment of points. Buyer purchases a
principal residence for $100,000. There is a total of $7,000 in
closing costs (exclusive of down payment) charged in connection with
the sale. Of this amount, $3,000 is charged as points (within the
meaning of paragraph (f) of this section). At closing, Buyer makes a
down payment of $20,000 and provides unborrowed funds in the amount
of $4,000 for the payment of various closing costs other than
points. Buyer finances payment of the points by increasing the
principal amount of the loan by $3,000. Seller makes no payments on
Buyer's behalf. Because Buyer has provided at closing funds that
have not been borrowed from the lender of record for this purpose in
an amount at least equal to the amount charged as points in the
transaction, the lender of record (or a qualified person) must
report $3,000 as points in accordance with this section and
Sec. 1.6050H-2.
Example 2. Seller-paid points. Buyer purchases a principal
residence for $100,000. There is a total of $7,000 in closing costs
(exclusive of down payment) charged in connection with the sale. Of
this amount, $3,000 is charged as points (within the meaning of this
paragraph (f)). Seller agrees to pay all closing costs on behalf of
Buyer, including the amount charged as points. Accordingly, the
amount paid by Seller as points is treated as paid directly by
Buyer, and the lender of record (or a qualified person) must report
the $3,000 as points in accordance with this section and
Sec. 1.6050H-2.

(4) Construction loans--(i) In general. An amount paid in
connection with indebtedness incurred to construct a residence, or to
refinance indebtedness incurred to construct a residence, is deemed to
be points for purposes of this section to the extent the amount--
(A) Is clearly designated on the loan documents as points incurred
in connection with the indebtedness, for example, as loan origination
fees, loan discount, discount points, or points;
(B) Is computed as a percentage of the stated principal amount of
the indebtedness incurred by the payor of record;
(C) Conforms to an established practice of charging points in the
area in which the loan is issued and does not exceed the amount
generally charged in the area;
(D) Is paid in connection with indebtedness incurred by the payor
of record to construct (or to refinance construction of) a residence
that is to be used, when completed, as the principal residence of the
payor of record;
(E) Is paid directly by the payor of record; and
(F) Is not allocable to indebtedness in excess of the aggregate
amount that may be treated as acquisition indebtedness under section
163(h)(3)(B)(ii).
(ii) Limitation on refinancing of construction loans. Amounts paid
in connection with refinancing indebtedness incurred to construct a
residence are not treated as points to the extent they are allocable to
indebtedness that exceeds the indebtedness incurred to construct the
residence.
(5) Amounts paid to mortgage brokers. Amounts received directly or
indirectly by a mortgage broker are treated as points under this
paragraph (f) to the same extent the amounts would be so treated if
they were paid to and retained by the lender of record, and must be
reported by the lender of record in accordance with this section and
Sec. 1.6050H-2.
(6) Effect on deduction of points. This section and Sec. 1.6050H-2
address only the information reporting requirements of section 6050H
and do not affect a payor of record's deduction for any amount in
accordance with applicable provisions of the Internal Revenue Code.
(g) Effective date--(1) In general. Except as provided in paragraph
(g)(2) of this section, this section is effective for mortgage interest
received after December 31, 1987. Section 1.6050H-1T contains rules for
reporting mortgage interest received after December 31, 1984, and
before January 1, 1988.
(2) Points. The reporting requirements of this section do not apply
to prepaid interest received in the form of points before January 1,
1995. In addition, the inclusion of points in the determination of
interest under paragraph (e)(1) of this section applies only to
transactions occurring after December 31, 1994.
Par. 4. Section 1.6050H-2 is amended as follows:
1. Paragraph (a) is amended as follows:
a. Paragraph (a)(2)(iii) is revised.
b. In paragraph (a)(2)(iv)(B) the word ``and'' at the end of the
paragraph is removed.
c. Paragraph (a)(2)(v) is redesignated as paragraph (a)(2)(vi).
d. New paragraph (a)(2)(v) is added.
2. Paragraph (d) is revised.
3. Paragraph (e) is amended as follows:
a. Paragraph (e)(1) is revised.
b. Paragraph (e)(1)(i) is added.
4. Paragraphs (e)(2) and (3) are redesignated as paragraphs
(e)(1)(ii) and (iii), respectively.
5. New paragraph (e)(2) is added.
6. Paragraph (g) is revised.
The additions and revisions read as follows:

Sec. 1.6050H-2 Time, form, and manner of reporting interest received
on qualified mortgage.

(a) * * *
(2) * * *
(iii) The amount of interest (other than points) required to be
reported with respect to the qualified mortgage for the calendar year;
* * * * *
(v) The amount of points paid directly by the payor of record
(within the meaning of Sec. 1.6050H-1(f)(3)) required to be reported
with respect to the qualified mortgage for the calendar year; and
* * * * *
(d) Reporting under designation agreement--(1) In general. An
interest recipient that receives or collects interest (including
points) on a mortgage may designate a qualified person to satisfy the
reporting requirements of paragraphs (a), (b), and (c) of this section.
If a designated qualified person reports as permitted under this
paragraph (d), it will satisfy the requirement of paragraph (a)(2)(ii)
of this section by including on Form 1098 (and Form 1096) the name,
address, and TIN of the designated qualified person.
(2) Qualified person. A qualified person is either--
(i) A trade or business with respect to which the interest
recipient is under common control within the meaning of Sec. 1.414(c)-
2; or
(ii) A person who is named as the designee by the lender of record
or by a qualified person (under paragraph (d)(2) of this section) in a
designation agreement entered into in accordance with paragraph (d)(3)
of this section, and who either was involved in the original loan
transaction or is a subsequent purchaser of the loan.
(3) Designation agreement. An interest recipient that designates a
qualified person to satisfy the reporting requirements described in
paragraphs (a), (b), and (c) of this section must make that designation
in a written designation agreement. The designation agreement must
identify the mortgage(s) and calendar years for which the designated
qualified person must report, and must be signed by both the designator
and designee. A designee may report an amount as having been paid
directly by the payor of record (for purposes of paragraph (a)(2)(v) of
this section) only if the designation agreement contains the
designator's representation that it did not lend such amount to the
payor of record as part of the overall transaction. The designator must
retain a copy of the designation agreement for four years following the
close of the calendar year in which the loan is made. The designation
agreement need not be filed with the Internal Revenue Service.
(4) Penalties. A designated qualified person is subject to any
applicable penalties provided in part II of subchapter B of chapter 68
of the Internal Revenue Code as if it were an interest recipient. A
designator is relieved from liability for applicable penalties by
designating a qualified person under the provisions of paragraph (d)(3)
of this section. Paragraph (e) of this section describes applicable
penalties.
(e) Penalty provisions--(1) Returns and statements the due date for
which (determined without regard for extensions) is after December 31,
1987, and before December 31, 1989. For purposes of this paragraph
(e)(1) only, all references to sections of the Internal Revenue Code
refer to sections of the Internal Revenue Code of 1986, as amended on
or before December 31, 1987.
(i) Failure to file return or to furnish statement. The section
6721 penalty applies to an interest recipient that fails to file a
return required by paragraph (a) of this section with respect to a
payor of record. The section 6722 penalty applies to an interest
recipient that fails to furnish a statement required by paragraph (b)
of this section to a payor of record.
* * * * *
(2) Returns and statements the due date for which (determined
without regard for extensions) is after December 31, 1989--(i) Failure
to file return or to furnish statement. The section 6721 penalty
applies to an interest recipient that fails to file a return required
by paragraph (a) of this section with respect to a payor of record. The
section 6722 penalty applies to an interest recipient that fails to
furnish a statement required by paragraph (b) of this section to a
payor of record.
(ii) Failure to furnish TIN. The section 6721 penalty may apply to
an interest recipient that fails to furnish the TIN of a payor of
record on a return required by paragraph (a) of this section. The
section 6721 penalty may apply to an interest recipient that fails to
request and to obtain the TIN of a payor of record under paragraph (f)
of this section.
(iii) Failure to include correct information. The section 6721
penalty may apply to an interest recipient that fails to include
correct information on a return required by paragraph (a) of this
section. The section 6722 penalty may apply to an interest recipient
that fails to include correct information on a statement required by
paragraph (b) of this section to be furnished to a payor record.
* * * * *
(g) Effective date--(1) In general. Except as provided in paragraph
(g)(2) of this section, this section is effective for mortgage interest
received after December 31, 1987. Section 1.6050H-1T contains rules for
reporting mortgage interest received after December 31, 1984, and
before January 1, 1988.
(2) Points. The reporting requirement of this section does not
apply to prepaid interest in the form of points received before January
1, 1995.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 5. The authority for part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 6. Section 602.101, the table in paragraph (c) is amended by
revising the entries for Secs. 1.6050H-1 and 1.6050H-2 to read as
follows:

Sec. 602.101 OMB Control numbers.

* * * * *
(c) * * *

------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------

*****
1.6050H-1.................................................. 1545-0901
1545-1380
1.6050H-2.................................................. 1545-0901
1545-1339
1545-1380

*****
------------------------------------------------------------------------

Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: November 1, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-30004 Filed 12-7-94; 8:45 am]
BILLING CODE 4830-01-U