Rp 2001-12

.03 All questions regarding publications may be directed to the following
web site:
Web site for publications:
www.irs.gov/forms_pubs
SECTION 18 EFFECT ON OTHER
DOCUMENTS
Section 6.05 of Rev. Proc. 96–17,
1996–1 C.B. 633, is modified to provide
the same relief as set forth in section 5.04
of this revenue procedure (regarding an
Agent not having to replace a previously
submitted Authorization under certain circumstances).
SECTION 19. EFFECTIVE DATE

ual circumstances, with an estimated
average of 32 minutes. The estimated
number of respondents and recordkeepers
is 390,685. The estimated annual frequency of responses is on occasion.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.

26 CFR 601.105: Examination of returns and
claims for refund, credit, or abatement;
determination of correct tax liability. (Also Part I,
§§ 860E, 860H; 1.860E–1.)

This revenue procedure is effective for
taxable years commencing after
December 31, 1999.

Rev. Proc. 2001–12

SECTION 20. PAPERWORK
REDUCTION ACT

This revenue procedure sets forth a safe
harbor for establishing the lack of
improper knowledge under § 1.860E–1(c)
of the Income Tax Regulations for transfers of noneconomic residual interests in
real estate mortgage investment conduits
(REMICs) and ownership interests in
Financial Asset Securitization Investment
Trusts (FASITs).

The collections of information contained
in this revenue procedure have been
reviewed and approved by the Office of
Management and Budget in accordance with
the Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1710.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless the collection of information displays a valid control
number.
The collections of information in this
revenue procedure are in sections 5, 6, 7,
8, 10, and 11. This information is required
by the Service to implement the Form 940
e-file Program and to enable taxpayers to
file their Forms 940 electronically. The
information will be used to ensure that
taxpayers receive accurate and essential
information regarding the filing of their
electronic returns and to identify persons
involved in the filing of electronic returns.
The collections of information are
required to retain the benefit of participating in the Form 940 e-file Program. The
likely respondents are business or other
for-profit institutions; federal, state or
local governments; nonprofit institutions;
and small businesses or organizations.
The estimated total annual reporting
and recordkeeping burden is 207,127
hours. The estimated annual burden per
respondent/recordkeeper varies from 10
minutes to 5 hours, depending on individ-

2001–3 I.R.B.

SECTION 1. PURPOSE

SECTION 2. BACKGROUND
The current regulations governing
REMICs contain rules governing the transfer of noneconomic residual interests in
REMICs. In general, a transfer of a noneconomic residual interest is disregarded for all
tax purposes if a significant purpose of the
transfer is to enable the transferor to impede
the assessment or collection of tax. This purpose exists if the transferor, at the time of the
transfer, either knew or should have known
that the transferee would be unwilling or
unable to pay taxes due on its share of the
REMIC’s taxable income.
The current regulations also contain a safe
harbor for establishing the lack of a purpose
to impede the assessment or collection of
tax. Under the safe harbor, a transferor of a
noneconomic residual interest in a REMIC
is presumed to lack this purpose if two
requirements are satisfied. First, the transferor must conduct a reasonable investigation
of the transferee’s financial condition.
Second, the transferor must secure a representation from the transferee stating that the
transferee understands the tax obligations

335

associated with holding a residual interest
and intends to pay those taxes.
The Internal Revenue Service and
Treasury have been concerned that some
transferors of residual interests have claimed
they satisfy the safe harbor even though the
economics of a transfer clearly indicate the
transferees are unwilling or unable to pay the
tax associated with holding the interest. For
this reason, on February 7, 2000, the Service
published in the Federal Register a notice of
proposed rulemaking (65 Fed. Reg. 5807)
designed to clarify the safe harbor. The proposed regulation explains that the safe harbor is unavailable unless the present value of
the anticipated tax liabilities associated with
holding the residual interest does not exceed
the sum of: (1) the present value of any consideration given to the transferee to acquire
the interest; (2) the present value of the
expected future distributions on the interest;
and (3) the present value of the anticipated
tax savings associated with holding the interest as the REMIC generates losses. This
clarification is proposed to be effective on
February 4, 2000. The notice of proposed
rulemaking published on February 7, 2000
also contained proposed rules for FASITs.
Proposed § 1.860H–6(g) provides requirements for transfers of FASIT ownership
interests and adopts a safe harbor for establishing lack of improper knowledge by reference to the safe harbor provisions of the
REMIC regulations.
Some commentators have stated that,
although current regulations are inadequate,
the proposed regulations are inappropriately
restrictive. This revenue procedure sets forth
an alternate safe harbor that may be used
while the Service and Treasury consider the
comments on the proposed regulations.
SECTION 3. SCOPE
This revenue procedure applies to all
transfers of noneconomic residual interests in REMICs. The principles set forth
in this revenue procedure, appropriately
adjusted with respect to terminology and
other technical differences between the
REMIC and FASIT provisions, also apply
to transfers of ownership interests in
FASITs. See section 8 for applicability.
SECTION 4. PROCEDURE
A transferor of a residual interest in a
REMIC is presumed not to have improper knowledge under § 1.860E–1(c) of the
regulations if–

January 16, 2001

.01 The transferor conducted, at the
time of the transfer, a reasonable investigation of the financial condition of the
transferee and, as a result of the investigation, the transferor found that the transferee had historically paid its debts as they
came due and found no significant evidence to indicate that the transferee will
not continue to pay its debts as they come
due in the future;
.02 The transferee represents to the
transferor that it understands that, as the
holder of the residual interest, the transferee may incur tax liabilities in excess of
any cash flows generated by the interest
and that the transferee intends to pay
taxes associated with holding the residual
interest as they become due; and
.03 Either section 5 or section 6 is satisfied.
SECTION 5. FORMULA TEST
.01 The present value of the anticipated
tax liabilities associated with holding the
residual interest does not exceed the sum of–
(1) The present value of any consideration given to the transferee to acquire
the interest;
(2) The present value of the expected future distributions on the interest; and
(3) The present value of the anticipated tax savings associated with holding
the interest as the REMIC generates losses.
.02 For purposes of section 5.01 of this
revenue procedure, both of the following
rules apply:
(1) The transferee is assumed to pay
tax at a rate equal to the highest rate of tax
specified in § 11(b)(1) of the Internal
Revenue Code; and
(2) Present values are computed
using a discount rate equal to the applicable Federal rate prescribed by § 1274(d)
compounded semiannually. (A lower discount rate may be used if the transferee
can demonstrate that it regularly borrows,
in the course of its trade or business, substantial funds at such lower rate from
unrelated third parties.)
SECTION 6. ASSET TEST
.01 The following three requirements
must be satisfied–
(1) At the time of the transfer, and at

January 16, 2001

the close of each of the transferee’s two
fiscal years preceding the year of transfer,
the transferee’s gross assets for financial
reporting purposes exceed $100 million
and its net assets for financial reporting
purposes exceed $10 million;
(2) The transferee is an eligible corporation (as defined in § 860L(a)(2)) that
makes a written agreement that any subsequent transfer of the interest will be to
another eligible corporation in a transaction that satisfies section 4; and
(3) The facts and circumstances
known to the transferor on or before the
date of the transfer must not reasonably
indicate that the taxes associated with the
residual interest will not be paid. The
consideration given to the transferee to
acquire the noneconomic residual interest
in the REMIC is only one factor to be
considered. However, if the amount of
consideration is so low that under any set
of reasonable assumptions a reasonable
person would conclude that the taxes
associated with holding the residual interest will not be paid, then the transferor is
deemed to know that the transferee cannot
or will not pay. In determining whether
the amount is too low, the specific terms
of the formula test in section 5 of this revenue procedure need not be used.
.02 For purposes of section 6.01 of this
revenue procedure, all of the following
rules apply:
(1) The gross assets and net assets of
a transferee do not include any obligation
of any person related to the transferee (as
defined in § 860L(g)) or any other asset if
a principal purpose for holding or acquiring that asset is to permit the transferee to
satisfy section 6 of this revenue procedure;
(2) A transfer fails to meet the
requirements of section 6 of this revenue
procedure if the transferor knows, or has
reason to know, that the transferee will
not honor the restrictions on subsequent
transfers of the residual interest; and
(3) Section 6.01(2) fails to be satisfied
in the case of any transfer or assignment of
the interest to a foreign branch of an eligible corporation or any other arrangement
by which the interest is at any time subject
to net tax by a foreign country or possession of the United States.

336

SECTION 7. EXAMPLES
.01 Example 1. Transfer to partnership.
X transfers a noneconomic residual interest in a REMIC to Partnership P. Y and Z
are the partners of P. The transfer does
not satisfy the formula test of section 5.
Even if Y and Z are eligible corporations
that satisfy section 6.01(1) and that make
the written agreement in section 6.01(2),
the transfer fails to qualify under section 4
because P is a partnership rather than an
eligible corporation.
.02 Example 2. Transfer to corporation
without capacity to carry additional residual interests. During the first ten months of
a year, Bank transfers five residual interests
to Corporation U under circumstances
meeting the requirements of section 6.
Bank is the major creditor of U and for that
reason has access to U’s financial records.
During the last month of the year, Bank
transfers three additional residual interests
to U. At the time of transfer, U’s financial
records indicate it has retained the previously transferred residual interests. Bank
has knowledge of U’s financial circumstances, including the aggregate tax liabilities it has assumed with respect to REMIC
residual interests, that would reasonably
cause Bank to conclude that U will be
unable to meet its tax liabilities when due.
The transfers in the last month of the year
fail to satisfy section 4 and 6.01(3) because
Bank has reason to know that U will not be
able to pay the tax due on those interests.
SECTION 8. EFFECTIVE DATE
This revenue procedure applies to all
transfers of noneconomic residual interests in REMICs and all transfers of FASIT
ownership interests occurring on or after
February 4, 2000, until the date specified
in future published guidance.
DRAFTING INFORMATION
A principal author of this revenue procedure is Courtney Shepardson of the
Office of Associate Chief Counsel
(Financial Institutions and Products). For
further information regarding this revenue
procedure contact Courtney Shepardson
at (202) 622-3940 (not a toll-free call).

2001–3 I.R.B.