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This is an important update from our
Tax and Business
Planning group.
For more information
on this topic,
contact:
William J. Sanders
Daniel J. Flanigan
Kraig M. Kohring
Erik R. Edwards
John F. Crawford
To learn more
about our Tax and
Business Planning
practice,
or to contact
one of our tax
attorneys,
click here.
www.polsinelli.com
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August 2010 |
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Polsinelli Shughart PC
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Tax and Business Planning Alert: |
IRS Releases Guidance on Troublesome REMIC Regulations
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On August 17, 2010, the Internal Revenue Service (IRS) released Revenue Procedure 2010-30 to provide guidance on (although it essentially modifies) certain provisions contained in the real estate mortgage investment conduit (REMIC) regulations that were issued on September 16, 2009. (Click here for a link to our e-alert issued last September on the changes to the REMIC rules.) Now, the IRS will not challenge releases of liens on real property even if the “principally secured test” is not met for “grandfathered transactions” and “qualified paydown transactions.” This Revenue Procedure now gives servicers much needed guidance in situations where the REMIC rules and the servicer’s contractual obligations are at odds, or where the release of a lien with a paydown makes economic sense even though the real property may not be principal secured.
New Guidance
Under the new Revenue Procedure, “grandfathered transactions” and “qualified paydown transactions” will not be required to meet the “principally secured test” for purposes of Section 860G(a)(3)(A) of the Internal Revenue Code and Section 1.860G-2(a)(8) of the Treasury Regulations.
A “grandfathered transaction” is a transaction that results in a release of a lien on an interest in real property that occurs by operation of the terms of the debt instrument (including a lien release pursuant to the exercise of a unilateral option of the borrower) where such terms providing for the lien release are contained in a contract that was executed no later than December 6, 2010.
A “qualified pay-down transaction” is a transaction in which a lien is released on an interest in real property and whereby a payment by the borrower results in a reduction in the adjusted issue price of the loan by a “qualified amount.” For these purposes, a “qualified amount” is any of the following: 1) the sum of net proceeds from an arms-length transaction, the net proceeds from a condemnation award, and the net proceeds from the receipt of an insurance or tort settlement; 2) a predetermined amount in the loan agreement and that equals or exceeds the product of (a) the adjusted issue price of the obligation multiplied by (b) a fraction equal to the fair market value at origination of the released interest, divided by the aggregate fair market value at origination of all of the interests that secured the loan immediately before the lien release; 3) the fair market value (at the time of the transaction) of the interest in real property the lien on which is released, plus the amount of any tort or insurance settlement; or 4) an amount such that, immediately after the transaction, the ratio of the adjusted issue price of the loan to the fair market value of the interests in real property securing the loan is no greater than what that ratio was immediately before the transaction.
The Revenue Procedure provides several examples about how these new rules operate. To view these examples and for a full text of Revenue Procedure 2010-30, click here.
For More Information:
To learn more about these changes and how they may affect you, please contact any of the attorneys listed below or any other Polsinelli Shughart attorney.
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About Polsinelli Shughart PC
With more than 500 attorneys, Polsinelli Shughart PC is a national law firm that is a recognized leader in the areas of business litigation, financial services, bankruptcy, real estate, business law, labor and employment, construction, life sciences and health care. Serving corporate, institutional and individual clients regionally, nationally and worldwide, Polsinelli Shughart is known for successfully applying forward-thinking strategies for both straightforward and complex legal matters. The firm can be found online at www.polsinelli.com. |
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