Notice 2007-17

Part III. Administrative, Procedural, and Miscellaneous
Modifications of Commercial
Mortgage Loans Held by a
REMIC
Notice 2007–17
I. PURPOSE
The Internal Revenue Service (IRS) and
the Department of the Treasury (Treasury)
receive many requests from the public to
resolve issues through published guidance.
Available resources limit the number of issues that can be addressed. As a result,
publication of guidance on many important tax issues is often delayed. Illustrative of the requests for guidance received
by the IRS and Treasury is a recent request
for an expansion of the permitted types of
modifications to loan obligations held by
a real estate mortgage investment conduit
(“REMIC”). This request relates to guidance in a narrow, technical area of the tax
law, where the need for guidance is driven
by market changes with which taxpayers
may be more familiar than are the IRS and
Treasury.
The IRS and Treasury have made, and
continue to make, efforts to develop ways
of publishing guidance in a more timely
and efficient manner. As part of this effort,
the IRS and Treasury anticipate the launch
of a pilot program to solicit greater input
from the public in the initial development
of certain guidance projects.
Under this pilot program, the IRS and
Treasury would publish a notice for each
guidance project selected for the program.
The notice would identify research, background documents, drafts of proposed
guidance and other work products, and
ask interested parties to provide them.
These written submissions from the public
will help the IRS and Treasury determine
whether it is appropriate to publish guidance. If so, the IRS and Treasury expect
that increased public participation in the
preliminary stages of certain guidance
development would provide a significant
benefit to taxpayers by permitting IRS
and Treasury to hasten the publication of
a greater number of guidance projects. It
is anticipated that notices issued under
the pilot program would follow the model
of this notice, relating to modifications

2007–12 I.R.B.

of commercial loan obligations held by a
REMIC.
As this and additional projects are completed, the IRS and Treasury will review
and evaluate the pilot program. Comments on the program may be solicited,
and IRS and Treasury will consider publishing guidelines for future projects.
As a model for the pilot program, the
IRS and Treasury solicit input, in the specific format described below, on whether
it is appropriate to amend existing income
tax regulations to permit certain modifications to securitized commercial mortgage
loans.
II. BACKGROUND
The REMIC provisions contained in
Part IV of subchapter M of Chapter 1 of
the Internal Revenue Code (sections 860A
- 860G) provide for a pass-through vehicle
that issues multiple classes of interests
in pools of residential and commercial
mortgage loans. All of the income from
the mortgage loans in the REMIC is taxed
to the holders of the regular and residual
interests in the REMIC. Among the requirements for qualification are that the
mortgage loans held by the REMIC must
consist of “qualified mortgages” that are
principally secured by an interest in real
property. All of a REMIC’s loans must be
acquired on the startup day of the REMIC
or within three months thereafter, except
that the REMIC may exchange a defective
loan for a “qualified replacement mortgage” for up to two years.
Section 1.860G–2(b)(1) of the Income
Tax Regulations provides that, subject to
certain exceptions described in section
1.860G–2(b)(3), if an obligation is significantly modified, then the modified
obligation is treated as one that was newly
issued in exchange for the unmodified
obligation that it replaced. If such a significant modification occurs after the obligation has been contributed to the REMIC
and the modified obligation is not a qualified replacement mortgage, the modified
obligation will not be a qualified mortgage and the deemed disposition of the
unmodified obligation will be a prohibited
transaction under section 860F(a)(2). Section 1.860G–2(b)(2) defines a “significant

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modification” as any change in the terms
of an obligation that would be treated as
an exchange of obligations under section
1001 and the related regulations. The
treatment of specific loan modifications as
deemed exchanges is addressed in section
1.1001–3. Section 1.1001–3 defines a loan
modification and provides that a modification that is significant will be treated as
a deemed exchange of the original loan for
a new loan.
Section 1.860G–2(b)(3) sets forth four
types of loan modifications that are expressly permitted without regard to the
section 1001 modification rules. The four
permitted modifications are: (i) changes
in the terms of the obligation occasioned
by default or a reasonably foreseeable default; (ii) assumption of the obligation; (iii)
waiver of a due-on-sale clause or a due on
encumbrance clause; and (iv) conversion
of an interest rate by a mortgagor pursuant
to the terms of a convertible mortgage.
The present REMIC regulations were
adopted in 1992 at a time when the mortgage-backed securities market involved
primarily residential mortgage loans.
Since the adoption of the REMIC regulations, the securitization of commercial
real estate mortgages has become more
common. The four types of modifications
that are expressly permitted without regard to the section 1001 modification rules
cover the most common changes affecting
residential mortgage loans, but may not
cover the range of likely changes in commercial mortgage loans.
To accommodate commercial mortgage loans, the IRS and Treasury are
considering whether the present REMIC
regulations should be amended to reflect
the evolution of market practices in the
mortgage-backed securities industry. In
particular, the IRS and Treasury are considering whether the regulations should be
amended to provide exceptions for certain
modifications of commercial mortgage
loans. In doing so, the IRS and Treasury
are considering whether such changes
would be consistent with the policy underlying existing regulatory provisions
and Congressional intent in enacting the
REMIC rules.

March 19, 2007

III. REQUEST FOR SUBMISSIONS
A. In General
The determination of whether to amend
the REMIC rules requires extensive legal
and policy analysis, as well as a better understanding of commercial mortgage securities industry practices. Consequently,
the IRS and Treasury are requesting written submissions from taxpayers, industry
associations, and other interested parties
to aid the IRS and Treasury in determining whether it is appropriate to amend the
REMIC regulations by expanding the list
of permitted loan modifications to include
certain modifications incurred in connection with commercial mortgages.
B. Format of Submissions
Submissions should include draft
changes to the REMIC regulations and
a policy memorandum. It is anticipated
that the draft amendment will include
proposed exceptions for new types of permissible loan modifications that reflect
routine industry practices in connection
with commercial mortgage loans.
The policy memorandum should discuss:
1. the evolution of market practices
in the securitization of commercial mortgages in REMIC form;
2. the relevant REMIC policy considerations affecting restrictions on mortgage
loan modifications;
3. the authority under current law for
amending the regulations to include exceptions for commercial mortgages;
4. the relationship between the section
1001 modification rules and the separate
REMIC modification rules;
5. an analysis of the extent to which the
four existing exceptions for mortgages and
any proposed exceptions for commercial
mortgages constitute departures from the
section 1001 modification rules;
6. the purpose and background of the
four existing exceptions for modifications
of mortgages in the REMIC modification
rules (including policies that might favor allowing assumptions and waivers of
due on sale clauses in programs intending
to assist residential housing acquisitions
(e.g., tax-exempt single family housing
bonds, VA & FHA insured mortgages));
7. examples of what are considered to
be common changes requested by borrow-

March 19, 2007

ers to the terms of commercial mortgages
and an explanation of why such changes
are requested by borrowers;
8. an explanation of each proposed
exception for commercial mortgages, including (i) how each proposed exception
is consistent with the underlying existing
regulatory provisions and Congressional
intent in enacting the REMIC rules, (ii)
whether the proposed exception relates to
a common change; and (iii) how each proposed exception would accommodate a legitimate business concern;
9. each proposed exception illustrated
by one or more examples;
10. whether there are alternatives to resolve industry issues related to commercial
mortgage loan modifications other than
through amending the regulations and the
feasibility of such alternatives (e.g., drafting documents to permit certain changes
to the terms of the commercial mortgage
loan to avoid triggering a significant modification under section 1.1001–3);
11. identification of the types of taxpayers and other interested persons who
are affected by the inability to modify commercial mortgage loans once the loan is
placed in a REMIC and how they are affected;
12. an estimate of how many taxpayers
and other interested persons are directly
and indirectly affected by an inability to
modify commercial mortgage loans;
13. potential consequences to the industry if changes are not made to the regulations to permit certain changes to the
terms of the commercial mortgage loans;
and
14. because some or all of the proposed
exceptions for commercial mortgage loans
will likely constitute a significant modification under section 1.1001–3, a discussion of the resulting tax consequences to
the REMIC of deemed exchange treatment
under section 1001 (e.g., how would the
existing REMIC rules treat a gain or loss
from a deemed exchange).
C. Communication with Submitting
Parties during the Drafting Process
Written submissions should fully develop the issues set forth in part III., B.,
above. A dialogue between submitting
parties and IRS and Treasury personnel
during the drafting process may help ensure that submissions are as comprehen-

749

sive as possible. Consequently, the IRS
and Treasury encourage submitting parties
to contact or meet with IRS and Treasury
personnel during the initial development
of their submissions.
IV. IRS AND TREASURY REVIEW OF
SUBMISSIONS
A. Meetings with a Submitting Party
A submitting party may be asked to
meet informally with personnel from IRS
and Treasury. These meetings are intended
to be used to explore the proposals and
the analysis supporting those proposals set
forth in a written submission and to gather
additional facts and information. Discussions at these meetings may focus on the
legal and policy justifications for each proposal, relevant industry practices, and any
other issues of concern raised by IRS and
Treasury personnel. At the end of these
meetings, the IRS and Treasury may request a submitting party to provide additional factual development or legal research. The IRS and Treasury may also
request additional meetings to the extent
necessary to clarify any remaining issues.
Any solicitation of input from interested persons will be done within the
requirements of the Federal Advisory
Committee Act. The IRS does not intend
to form advisory committees during this
process. Although input is welcome, interested parties will not be invited to enter
into negotiations or to participate in the
decision-making process with respect to
the proposed resolution of any issue.
B. IRS and Treasury Review and
Decision-Making
After IRS and Treasury personnel have
met with submitting parties and have been
provided with any additional information
requested, IRS and Treasury personnel
will further review all submitted material, and develop any additional legal
and policy analysis. After the review
process is completed, the IRS and Treasury will decide whether it is appropriate
to publish guidance that permits certain
modifications to commercial real estate
loans. If guidance is appropriate, the IRS
and Treasury intend to publish proposed
amendments to the REMIC regulations
permitting additional types of modifications to commercial real estate loans.

2007–12 I.R.B.

V. DEADLINE AND ADDRESS FOR
SUBMISSIONS
Written submissions should be submitted no later than Monday, April
30, 2007, to Internal Revenue Service,
CC:PA:LPD:RU (Notice 2007–17), room
5203, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044. Submissions may be hand delivered between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:RU (Notice 2007–17),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washington, DC 20224. Alternatively, submissions may be submitted via the Internet at
[email protected]
(Notice 2007–17). All submissions will
be available for public inspection and
copying in their entirety. Therefore, submissions received by the IRS and Treasury should not include taxpayer-specific
information of a confidential nature. Submissions should include the name and
telephone number of a person to contact.
VI. DRAFTING INFORMATION
The principal author of this notice is
Diana Imholtz of the Office of Associate
Chief Counsel (Financial Institutions and
Products). For further information regarding this notice, contact Ms. Imholtz at
202–622–3930 (not a toll-free call).

Reporting on Acquisitions
of Interests in Insurance
Contracts in Which Certain
Tax-Exempt Organizations
Hold an Interest
Notice 2007–24
PURPOSE
This notice invites public comments on
draft IRS forms to implement a new information reporting requirement for charities and certain other entities with respect
to certain structured insurance contracts
explained below. Public comments are
also invited with respect to a Congressionally mandated study being conducted by
the Department of the Treasury (the Treasury) and the Internal Revenue Service
(the Service). The new reporting requirements and study are required by section

2007–12 I.R.B.

6050V of the Internal Revenue Code (the
Code), which was added by section 1211
of the Pension Protection Act of 2006,
Pub. L. No. 109–280, 120 Stat. 780
(2006) (PPA). In general, section 1211 of
the PPA imposes a new information reporting requirement on organizations (including certain government entities) to which
contributions are deductible for Federal income, estate or gift tax purposes and which
acquire an applicable insurance contract
in a reportable acquisition after August
17, 2006, but on or before August 17,
2008. To enable these organizations to satisfy the requirements of section 6050V, the
Treasury and the Service designed Form
8921, Transactions Involving a Pool of Applicable Insurance Contracts, and Form
8922, Applicable Insurance Contract Information Return (For Tax-Exempt Organizations and Government Entities under
Section 6050V). Copies of the draft forms,
and their instructions, are attached to this
notice. The information collected on the
forms and the public comments will assist
the Treasury and the Service in conducting
the study mandated under section 1211 of
the PPA.
BACKGROUND
Recently, there has been an increase
in transactions involving the acquisition
of life insurance contracts under arrangements in which both a tax-exempt organization and private investors have an interest in a contract. Under such arrangements, private investors often provide capital used to fund the purchase of the life insurance contracts (and, sometimes, annuity and endowment contracts). Both the
private investors and the tax-exempt organization have an interest, directly or indirectly, in the contracts and receive cash,
either while the contracts are in force or
upon the death of the insured individual.
LEGISLATION
Section 6050V of the Code requires
each applicable exempt organization that
makes a reportable acquisition of an applicable insurance contract to file an information return at a prescribed time and
in a prescribed form. The information reporting requirement applies to reportable
acquisitions after August 17, 2006, but
before August 17, 2008. Penalties under
sections 6721 and 6724(d)(1)(B)(iv) apply

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to applicable exempt organizations that do
not file an information return as required
under section 6050V.
For purposes of section 6050V of the
Code, an applicable exempt organization
is generally a religious, charitable, scientific, literary, educational, amateur sports
or similar organization, a fraternal society operating on a lodge system, a governmental organization (including an Indian Tribal Government), a Veterans’ organization, a cemetery company, or an employee stock ownership plan. A reportable
acquisition is the acquisition by an applicable exempt organization of a direct or
indirect interest in an applicable insurance
contract in any case in which the acquisition is a part of a structured transaction involving a pool of such contracts. An applicable insurance contract is any life insurance, annuity, or endowment contract in
which both an applicable exempt organization and a person other than an applicable
exempt organization have directly or indirectly held an interest (whether or not at the
same time). Exceptions apply in the case
of persons with an insurable interest in the
insured independent of the applicable exempt organization, named beneficiaries, or
in limited circumstances, trust beneficiaries or trustees. For example, under section
6050V(d)(2)(B)(ii), an insurance contract
is not an applicable insurance contract if
the applicable exempt organization’s sole
interest in the contract is as a named beneficiary.
The Treasury and the Service intend
that Form 8921 will be used to report information to the Service about structured
transactions under which there have been
reportable acquisitions of applicable insurance contracts made by an applicable exempt organization. Form 8922 will be used
to report information to the Service about
the applicable insurance contracts that are
part of a structured transaction required to
be reported on a Form 8921.
Generally, on Form 8921, an applicable
exempt organization would:

•

Report information on the transaction
itself, including information about the
applicable exempt organization, other
participants in the transaction, and the
cash flows associated with the transaction.

March 19, 2007