26 Cfr 1.163-5t

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ELECTRONIC CODE OF FEDERAL REGULATIONS
e-CFR data is current as of November 29, 2016
Title 26 → Chapter I → Subchapter A → Part 1 → §1.163-5t
Title 26: Internal Revenue
PART 1—INCOME TAXES (CONTINUED)
§1.163-5T Denial of interest deduction on certain obligations issued after December 31, 1982, unless issued in
registered form (temporary).
(a)-(c) [Reserved]
(d) Pass-through certificates. (1) A pass-through or participation certificate evidencing an interest in a pool of
mortgage loans which under subpart E of subchapter J of the Code is treated as a trust of which the grantor is the owner
(or similar evidence of interest in a similar pooled fund or pooled trust treated as a grantor trust) (“pass-through certificate”)
is considered to be a “registration-required obligation” under section 163(f)(2)(A) and §1.163-5(c) if the pass-through
certificate is described in section 163(f)(2)(A) and §1.163-5(c) without regard to whether any obligation held by the fund or
trust to which the pass-through certificate relates is described in section 163(f)(2)(A) and §1.163-5(c). A pass-through
certificate is considered to be described in section 163(f)(2)(B) and §1.163-5(c) if the pass-through certificate is described
in section 163(f)(2)(B) and §1.163-5(c) without regard to whether any obligation held by the fund or trust to which the passthrough certificate relates is described in section 163(f)(2)(B) and §1.163-5(c).
(2) An obligation held by a fund or trust in which ownership interests are represented by pass-through certificates is
considered to be in registered form under section 149(a) and the regulations thereunder or to be described in section 163
(f)(2) (A) or (B), if the obligation held by the fund or trust is in registered form under section 149(a) and the regulations
thereunder or is described in section 163(f)(2) (A) or (B), respectively, without regard to whether the pass-through
certificates are so considered.
(3) For purposes of section 4701, a pass-through certificate is considered to be issued solely by the recipient of the
proceeds from the issuance of the pass-through certificate (hereinafter the “sponsor”). The sponsor is therefore liable for
any excise tax under section 4701 that may be imposed with reference to the principal amount of the pass-through
certificate.
(4) In order to implement the purpose of section 163, §1.163-5(c) and this section, the Commissioner may
characterize a certificate or other evidence of interest in a fund or trust which under subpart E of subchapter J of the Code
is treated as a trust of which the grantor is the owner and any obligation held by such fund or trust in accordance with the
substance of the arrangement they represent and may impose the penalties provided under sections 163(f)(1) and 4701 in
the appropriate amounts and on the appropriate persons. This provision may be applied, for example, where a corporation
issues obligations purportedly in registered form, contributes them to a grantor trust as its only assets, and arranges for
the sale to investors of bearer certificates of interest in the trust which do not meet the requirements of section 163(f)(2)
(B). If this provision is applied, the obligations held by the fund or trust will not be considered to be issued in registered
form or to meet the requirements of section 163(f)(2)(B). The corporation will not be allowed a deduction for the payment
of interest on the obligations held by the trust, and the excise tax under section 4701, calculated with reference to the
principal amount of the obligations held by the trust will be imposed on the corporation may be collected from the
corporation and its agents. This paragraph (d)(4) will not be applied so as to alter the tax consequences of transactions as
to which rulings have been issued by the Internal Revenue Service prior to September 19, 1985.
(5) The rules set forth in this paragraph (d) apply solely for purposes of sections 4701, 163(f)(2)(A), 163(f)(2)(B),
§1.163-5(c), and any other section that refers to this section for the definition of the term “registration-required
obligation” (such as the regulations under sections 871(h) and 881(c)). The treatment of obligations described in this
paragraph (d) for purposes of section 163(f)(2) (A) and (B) does not affect the determination of whether bearer obligations
that are issued or guaranteed by the United States Government, a United States Government-owned agency, a United
States Government sponsored enterprise (within the meaning of §1.163-5(c)(1)) or that are backed (as described in the
Treasury Department News Release R-2835 of September 10, 1984 and Treasury Department News Release R-2847 of
September 14, 1984) by obligations issued by the United States Government, a United States Government-owned
agency, or a United States Government sponsored enterprise comply with the requirements of section 163(f)(2)(B) and the
regulations thereunder.
(6) The provisions of paragraphs (d) (1) through (5) may be illustrated by the following example:

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Commercial Bank K forms a pool of 1000 residential mortgage loans, each made to a different individual homeowner, by
assigning them to Commercial Bank L, an unrelated entity serving as trustee of the pool. Commercial Bank L immediately sells in a
public offering certificates of interest in the trust of a maturity of 10 years in registered form. Commercial Bank L transfers the cash
proceeds of the offering to Commercial Bank K. The certificates of interest in the trust are of a type offered to the public and are not
described in section 163(f)(2)(B). Pursuant to paragraph (d)(1), the certificates of interest in the pool are registration-required
obligations without regard to the fact that the obligations held by the trust are not registration-required obligations.

(e) Regular interests in REMICS. (1) A regular interest in a REMIC, as defined in sections 860D and 860G and the
regulations thereunder, is considered to be a “registration-required obligation” under section 163(f)(2)(A) and §1.163-5(c) if
the regular interest is described in section 163(f)(2)(A) and §1.163-5(c), without regard to whether any obligation held by
the REMIC to which the regular interest relates is described in section 163(f)(2)(A) and §1.163-5(c). A regular interest in a
REMIC is considered to be described in section 163(f)(2)(B) and §1.163-5(c), if the regular interest is described in section
163(f)(2)(B) and §1.163(c), without regard to whether any obligation held by the REMIC to which the regular interest
relates is described in section 163(f)(2)(B) and §1.163-5(c).
(2) An obligation held by a REMIC is considered to be described in section 163(f)(2) (A) or (B) if such obligation is
described in section 163(f)(2) (A) or (B), respectively, without regard to whether the regular interests in the REMIC are so
considered.
(3) For purposes of section 4701, a regular interest is considered to be issued solely by the recipient of the proceeds
from the issuance of the regular interest (hereinafter the “sponsor”). The sponsor is therefore liable for any excise tax
under section 4701 that may be imposed with reference to the principal amount of the regular interest.
(4) In order to implement the purpose of section 163, §1.163-5(c), and this section, the Commissioner may
characterize a regular interest in a REMIC and any obligation held by such REMIC in accordance with the substance of
the arrangement they represent and may impose the penalties provided under sections 163(f)(1) and 4701 in the
appropriate amounts and on the appropriate persons. This provision may be applied, for example, where a corporation
issues an obligation that is purportedly in registered form and that will qualify as a “qualified mortgage” within the meaning
of section 860G(a)(3) in the hands of a REMIC, contributes the obligation to a REMIC as its only asset, and arranges for
the sale to investors of regular interests in the REMIC in bearer form that do not meet the requirements of section 163(f)(2)
(B). If this provision is applied, the obligation held by the REMIC will not be considered to be issued in registered form or to
meet the requirements of section 163(f)(2)(B). The corporation will not be allowed a deduction for the payment of interest
on the obligation held by the REMIC, and the excise tax under section 4701, calculated with reference to the principal
amount of the obligation held by the REMIC, will be imposed on the corporation and may be collected from the corporation
and its agents.
[T.D. 8202, 53 FR 17928, May 19, 1988, as amended by T.D. 8300, 55 FR 19626, May 10, 1990]

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