I

104TH CONGRESS

1ST SESSION H. R. 1967

To Facilitate Asset Securitization Through the Creation of Financial Asset

Securitization Investment Trusts.

IN THE HOUSE OF REPRESENTATIVES

JUNE 29, 1995

Mr. SHAW (for himself, Mr. RANGEL, Mr. ZIMMER, Mr. MCDERMOTT, Mr.

PAYNE of Virginia, Mrs. KENNELLY, Mr. CARDIN, Mr. ENGLISH of Pennsylvania, Mr. SAM JOHNSON of Texas, Mr. HANCOCK, Mr. CHRISTENSEN,

Mr. NEAL of Massachusetts, Mr. CRANE, Mr. THOMAS, Mr. COLLINS of

Georgia, Mr. KLECZKA, Ms. DUNN of Washington, Mr. HOUGHTON, Mr.

MATSUI, Mrs. JOHNSON of Connecticut, Mr. HERGER, Mr. NUSSLE, and

Mr. PORTMAN) introduced the following bill; which was referred to the

Committee on Ways and Means

A BILL

To Facilitate Asset Securitization Through the Creation of

Financial Asset Securitization Investment Trusts.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as ‘‘The Securitization En5 hancement Act of 1995.’’
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1 SEC. 2. FINANCIAL ASSET SECURITIZATION INVESTMENT

2 TRUSTS.

3 (a) The table of subchapter M of chapter 1 of the

4 Internal Revenue Code of 1986, is amended by adding the

5 following title:

6 ‘‘PART V—SECURITIZATION TRUSTS’’

7 (b) The following new heading and table is added im8 mediately following section 860G of the Internal Revenue

9 Code of 1986:

‘‘PART V—SECURITIZATION TRUSTS

Sec. 860H. Taxation of financial asset securitization investment trusts.

Sec. 960I. Taxation of owners of FASIT.

Sec. 860J. Contributions by owners.

Sec. 860K. Disqualified holders of certain interests.

Sec. 860L. Definitions.

10 (c) The following new sections are added as part V

11 of subchapter M of chapter 1 of the Internal Revenue

12 Code of 1986:

13 ‘‘SEC. 860H. TAXATION OF FINANCIAL ASSET

14 SECURITIZATION INVESTMENT TRUSTS.

15 ‘‘(a) OWNERS, NOT ENTITY, SUBJECT TO TAX.—Ex16 cept as otherwise provided in subsection (c), a FASIT

17 shall not be subject to taxation under this subtitle and

18 shall not be treated as a trust, partnership, corporation

19 or taxable mortgage pool.

20 ‘‘(b) TREATMENT OF FASIT DEBT INSTRUMENTS.—

21 For purposes of this subtitle any qualified or permitted

22 debt instrument issued by a FASIT shall be treated as
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1 indebtedness of the FASIT (and as indebtedness of a cor2 poration). The amounts includible in gross income by a

3 holder with respect to any such debt instrument shall be

4 determined under the accrual method of accounting.

5 ‘‘(c) TAX ON PROHIBITED INCOME.—

6 ‘‘(1) There is hereby imposed on the FASIT a

7 tax on any prohibited income for the taxable year.

8 Such tax shall be imposed at the rate of 100 per9 cent, except that in the case of any prohibited in10 come described in subparagraph (2)(D) the tax shall

11 be imposed at the highest rate specified in section

12 11(b)(1).

13 ‘‘(2) For purposes of this subsection, prohibited

14 income shall mean—

15 ‘‘(A) gross income derived from any asset

16 that is not a permitted asset,

17 ‘‘(B) gain from the disposition of any asset

18 that was acquired by the FASIT for the prin19 cipal purpose of recognizing gains (or reducing

20 losses) as a result of an increase in the market

21 value of the asset following its acquisition

22 (other than an increase attributable to any

23 bond discount),

24 ‘‘(C) compensation for services (not includ25 ing, for this purpose, any payments received
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1 pursuant to the terms of permitted assets held

2 by the FASIT), and

3 (D) income that would be net income from

4 foreclosure property under section 857(b)(4)(B)

5 if the FASIT were a real estate investment

6 trust and all property acquired by the FASIT

7 in connection with the default or imminent de8 fault of a debt obligation were foreclosure prop9 erty.

10 ‘‘(d) TREATMENT UNDER SUBTITLE F.—Except as

11 otherwise provided in regulations, for purposes of subtitle

12 F (other than determining who may sign a FASIT tax

13 return) a FASIT shall be treated as a partnership with

14 a calendar year taxable year and holders of ownership in15 terests in such FASIT shall be treated as partners.

16 ‘‘(e) TERMINATION OF FASIT STATUS.—An entity

17 that ceases to be a FASIT shall be treated as having dis18 tributed all of its assets to the holders of its interests,

19 in accordance with their terms, immediately prior to such

20 cessation.

21 ‘‘SEC. 860I. TAXATION OF OWNERS OF FASIT.

22 ‘‘(a) IN GENERAL.—

23 ‘‘(1) PASS-THROUGH OF FASIT INCOME OR

24 LOSS.—
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1 ‘‘(A) IN GENERAL.—The holder of an own2 ership interest in a FASIT shall take into ac3 count his daily portion of the taxable income or

4 net loss of such FASIT for each day during the

5 taxable year on which such holder held such in6 terest.

7 ‘‘(B) CHARACTER, ETC.—Except as other8 wise provided in regulations, items of FASIT

9 income or loss (other than the tax-exempt na10 ture of any interest income) taken into account

11 under this paragraph shall have the same char12 acter, source, and other attributes in the hands

13 of a holder of an ownership interest as such

14 items would have if they were incurred directly

15 by such holder.

16 ‘‘(2) DAILY PORTION.—The daily portion re17 ferred to in paragraph (1) shall be determined—

18 ‘‘(A) by allocating to each day in any ac19 crual period its ratable portion of the FASIT’s

20 taxable income (or net loss) for such period,

21 ‘‘(B) by dividing the amounts so allocated

22 to any day among the holders of ownership in23 terests on such day in proportion to their re24 spective holdings on such day, and
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1 ‘‘(C) by making appropriate adjustments

2 among holders, consistent with the principles

3 described in section 860J(b)(3)(D).

4 ‘‘(3) TAXABLE INCOME.—Except as otherwise

5 provided in regulations, the taxable income or net

6 loss of a FASIT shall be determined in the same

7 manner as in the case of a corporation using the ac8 crual method and having a calendar year taxable

9 year, except that—

10 ‘‘(A) the basis of any property (and the ad11 justed issue price of any debt obligation) re12 ceived by a FASIT in a qualified exchange shall

13 be equal to the property’s basis in the hands of

14 the transferor immediately before the exchange,

15 ‘‘(B) the constant yield method, including

16 the rules of section 1272(a)(6), shall be applied

17 in determining all interest, original issue dis18 count, and market discount income and all pre19 mium deductions or adjustments with respect to

20 all debt obligations held by the FASIT,

21 ‘‘(C) section 163(e)(5) shall not apply with

22 respect to any debt instrument,

23 ‘‘(D) the amount of the FASIT’s prohib24 ited income described in section 860H(b)(2)(D)

25 (relating to net income from foreclosure prop-
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1 erty) shall be reduced by the amount of tax im2 posed thereon by section 806H(b)(1),

3 ‘‘(E) there shall not be taken into account

4 any item of income, gain, loss or deduction allo5 cable to prohibited income (other than prohib6 ited income described in the preceding subpara7 graph), and

8 ‘‘(F) any distribution of property with re9 spect to a FASIT security (other than a dis10 tribution to which subsection (b)(5) applies)

11 shall be treated as if the FASIT had sold such

12 property for cash (in an amount equal to the

13 property’s fair market value) and distributed

14 such cash.

15 ‘‘(4) LOSS LIMITATION.—

16 ‘‘(A) IN GENERAL.—The losses taken into

17 account by any holder with respect to an owner18 ship interest under paragraph (1) of this sub19 section for any accrual period shall not exceed

20 the holder’s adjusted basis in such ownership

21 interest as of the close of such period (deter22 mined without regard to any basis reduction for

23 such losses for such loses for such period).

24 ‘‘(B) INDEFINITE CARRYFORWARD.—A

25 loss disallowed to a holder by reason of sub-
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1 paragraph (A) shall be treated by the holder in

2 the same manner as if it were a loss incurred

3 by the FASIT with respect to such holder in

4 the succeeding accrual period.

5 ‘‘(b) DISTRIBUTIONS AND BASIS RULES.—

6 ‘‘(1) DISTRIBUTIONS.—A distribution by a

7 FASIT with respect to an ownership interest shall

8 not be included in gross income to the extent it does

9 not exceed the adjusted basis of the interest, and

10 shall be treated as gain from the sale or exchange

11 of such interest to the extent it exceeds the adjusted

12 basis of the interest.

13 ‘‘(2) BASIS RULES.—The basis of any person’s

14 ownership interest in a FASIT—

15 ‘‘(A) shall be increased by—

16 ‘‘(i) the amount of any money (and

17 the transferor’s basis in any property) con18 tributed by such person with respect to

19 such interest, and

20 ‘‘(ii) the amount of any taxable in21 come taken into account by such person

22 with respect to such interest under section

23 860I(a)(1), section 860I(b)(3) or section

24 860J(b), and
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1 ‘‘(B) shall thereafter be decreased (in the

2 following order but not below zero) by—

3 ‘‘(i) the amount of any distributions

4 to such person with respect to such inter5 est,

6 ‘‘(ii) the amount of any deductions

7 taken into account by such person with re8 spect to such interest under section

9 860I(b)(3) or section 860J(b), and

10 ‘‘(iii) the amount of any losses taken

11 into account by such person with respect to

12 such interest under section 860I(a)(1).

13 ‘‘(3) SECONDARY PURCHASERS.—In the case of

14 any ownership interest (or portion thereof) not ac15 quired in a qualified exchange (within the meaning

16 of section 860J(a)(2)), the holder shall, at the end

17 of an accrual period—

18 ‘‘(A) take into account as ordinary income

19 the excess, if any, of the fair market value of

20 such ownership interest (or portion) over his

21 adjusted basis therein (determined after the ap22 plication of section 860I(a)(1) for such period),

23 and

24 ‘‘(B) to the extent permitted in regula25 tions, take into account as an ordinary deduc-
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1 tion the excess, if any, of his adjusted basis in

2 such interest or portion (determined after the

3 application of section 860I(a)(1) for such pe4 riod) over the fair market value thereof.

5 ‘‘(4) TREATMENT OF CERTAIN PROPERTY

6 TRANSFERS.—Notwithstanding paragraph (1) and

7 (2), rules similar to those provided by section

8 707(a)(2)(B) and section 737 shall apply as if the

9 FASIT were a partnership and the holders of its

10 ownership interests were partners.

11 ‘‘(5) LIMITATIONS ON GAINS AND LOSSES.—

12 Notwithstanding any other provision of this subpart,

13 gain or loss shall not be recognized (and appropriate

14 basis adjustments shall be made) upon—

15 ‘‘(A) a distribution of property that is sub16 stantially identical to property contributed by

17 the distributee (or by a party bearing a rela18 tionship to the distributee described in section

19 267(b) or section 707(b)), or

20 ‘‘(B) any other event prescribed in regula21 tions where recognition of gain or loss would be

22 inappropriate in light of the holder’s economic

23 position before and after the event.

24 ‘‘(c) SPECIAL TREATMENT OF CERTAIN INCOME.—
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1 ‘‘(1) IN GENERAL.—Except as provided in para2 graph (3), the taxable income of any holder of

3 FASIT ownership interests for any taxable year

4 shall in no event be less than the taxable income de5 termined solely with respect to such ownership inter6 ests.

7 ‘‘(2) COORDINATION WITH SECTION 172.—The

8 amount of any income required to be taken into ac9 count in a taxable year by the holder of a FASIT

10 ownership interest as a result of the application of

11 the preceding paragraph shall be disregarded.

12 ‘‘(A) in determining under section 172 the

13 amount of any net operating loss for such tax14 able year, and

15 ‘‘(B) in determining taxable income for

16 such taxable year for purposes of the 2nd sen17 tence of section 172(b)(2).

18 ‘‘(3) EXCEPTION.—Paragraph (1) shall not

19 apply to any FASIT ownership interests to the ex20 tent they are comprised of economic interests in the

21 FASIT that—

22 ‘‘(A) were part or all of the consideration

23 received in exchange for the transfer to the

24 FASIT of—
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1 ‘‘(i) debt obligations originated by the

2 holder (including any corporate prede3 cessor), by any member of the same affili4 ated group of corporations joining in the

5 filing of a consolidated return for the tax6 able year, or by any person with respect to

7 whose basis the holder’s basis in such secu8 rity is determined, and

9 ‘‘(ii) assets having a relationship to

10 such debt obligations described in section

11 860L(b)(4),

12 ‘‘(B) had a fair market value at the time

13 of such exchange at least equal to 2 percent of

14 the total consideration received in the exchange,

15 and

16 ‘‘(C) had an anticipated weighted average

17 life at least equal to 20 percent of the antici18 pated weighted average life (in the hands of the

19 FASIT) of the debt obligations and assets

20 transferred in the exchange.

21 This paragraph shall not apply if the FASIT

22 would have been treated as a corporation under sec23 tion 7701(i) but for the application of section

24 860H(a).
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1 ‘‘(4) CERTAIN TRANSFERS OF LOSS ASSETS.—

2 If an asset is transferred in a qualified exchange,

3 and one of the principal purposes of such transfer

4 is avoidance of the limitations of subsection (c)(1),

5 then any losses or deductions properly attributable

6 to the transferred asset (including an excess of in7 terest expense over interest income) shall be dis8 regarded for purposes of subsection (c)(1).

9 ‘‘SEC. 860J. CONTRIBUTIONS BY OWNERS.

10 ‘‘(a) TREATMENT OF QUALIFIED EXCHANGES.—

11 ‘‘(1) NONRECOGNITION OF GAIN AND LOSS.—

12 Notwithstanding any other provision of this subtitle,

13 gain or loss shall not be recognized to the transferor

14 or the FASIT in a qualified exchange.

15 ‘‘(2) DEFINITION.—A qualified exchange is any

16 transfer of property to a FASIT by a person that

17 holds any ownership interests of the FASIT imme18 diately after such exchange. Notwithstanding the

19 preceding sentence, to the extent permitted in regu20 lations a transferor may elect not to treat a transfer

21 as a qualified exchange.

22 ‘‘(3) TREATMENT OF BOOT.—

23 ‘‘(A) IN GENERAL.—The receipt in a quali24 fied exchange of money, debt instruments, or

25 other property other than ownership interests
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1 shall be treated as a distribution with respect to

2 the recipient’s ownership interests occurring im3 mediately following a contribution to the

4 FASIT.

5 ‘‘(B) DEBT INSTRUMENTS.—The issuance

6 of any FASIT debt instrument to a holder of

7 ownership interests shall be treated as if the in8 strument had been issued to the holder for cash

9 equal to its issue price and such cash had been

10 distributed to the holder with respect to its

11 ownership interests. The issue price of such in12 strument shall equal its fair market value, ex13 cept that if such instrument is issued as part

14 of a public offering the issue price shall be de15 termined under section 1273.

16 ‘‘(b) RECOGNITION AND AMORTIZATION OF BUILT17 IN GAIN, ETC.—

18 ‘‘(1) IN GENERAL.—At the end of each accrual

19 period the holder of an ownership interest (other

20 than an ownership interest or portion thereof to

21 which section 860I(b)(3) applies)—

22 ‘‘(A) shall recognize ordinary income equal

23 to any increase during the period, and

24 ‘‘(B) shall be entitled to an ordinary de25 duction (or similar adjustment for amortizable
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1 bond premium) equal to any decrease during

2 the period,

3 in the amount described in paragraph (2).

4 ‘‘(2) AMOUNT DESCRIBED.—The amount de5 scribed in this paragraph is the product of—

6 ‘‘(A) FASIT’S UNRECOGNIZED GAIN.—Any

7 excess of the fair market value of the FASIT’s

8 assets over the FASIT’s aggregate basis in

9 such assets,

10 ‘‘(B) FASIT’S LEVERAGE RATIO.—One,

11 minus the amount determined by dividing—

12 ‘‘(i) the fair market value of the

13 FASIT’s ownership interests, by

14 ‘‘(ii) the fair market value of the

15 FASIT’s assets, and

16 ‘‘(C) HOLDER’S OWNERSHIP FRACTION.—

17 The fraction of the FASIT’s ownership inter18 ests that are held by the holder.

19 ‘‘(3) SPECIAL RULES.—

20 ‘‘(A) DEFERRED GAIN RECOGNITION.—

21 Notwithstanding paragraph (1), if FASIT debt

22 securities are issued to a holder of ownership

23 interests in the FASIT and one of the principal

24 purposes of such issuance is to accelerate the

25 recognition of taxable income to such holder,
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1 then the gain that would otherwise be acceler2 ated as a result of such issuance shall be de3 ferred until such debt securities are disposed of

4 in a transaction in which gain would be recog5 nized to the holder.

6 ‘‘(B) ANTI-STUFFING.—If assets are con7 tributed to a FASIT and there is no substantial

8 business purpose for such contribution other

9 than decreasing the ratio described in subpara10 graph (2)(B), then such assets shall be dis11 regarded in determining such ratio.

12 ‘‘(C) SUBPOOLS.—If a single FASIT in13 cludes two or more pools of assets that pre14 dominantly support separate debt instruments,

15 this subsection shall be applied as if such sepa16 rate pools and their related debt instruments

17 were separate FASIT’s.

18 ‘‘(D) MULTIPLE TRANSFERORS.—Rules

19 similar to those contained in section 704(c)

20 shall apply to reallocate items of income, gain,

21 loss and deduction among holders of ownership

22 interests to reflect differing amounts of built-in

23 gain or loss at the time property was contrib24 uted in qualified exchanges. Allocations of items

25 of income or deduction to any holder under this
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1 clause shall not be limited by any overall in2 come or loss of the FASIT or any portion

3 thereof.

4 ‘‘(c) VALUATION OF CERTAIN ASSETS AND SECURI5 TIES.—

6 ‘‘(1) REPLACEMENTS OF ASSETS BY TRANS7 FEROR.—The fair market value of any FASIT own8 ership interests shall be determined without regard

9 to any future transfers of assets in qualified ex10 changes that the transferor may be obligated or per11 mitted to make.

12 ‘‘(2) TREATMENT OF REVOLVING LOAN

13 POOLS.—In the case of any FASIT holding obliga14 tions representing extensions of credit on revolving

15 loan accounts having substantially the same terms—

16 ‘‘(A) each extension of credit shall be

17 treated as a separate obligation, and

18 ‘‘(B) the anticipated cash flows and fair

19 market value of each such obligation shall be

20 determined using a periodic principal payment

21 rate equal to the reasonably anticipated periodic

22 rate at which principal payments on the ac23 counts will be made, as a proportion of their

24 aggregate outstanding principal balances.
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1 ‘‘(d) INVESTMENT PARTNERSHIP RULES APPLICA2 BLE.—Notwithstanding subsection (a), gain shall be rec3 ognized (and appropriate basis adjustments shall be made)

4 to the extent that gain would be required to be recognized

5 under section 721(b) if the FASIT were a partnership

6 (treating as a single taxpayer all transferors that are

7 members of the same affiliated group of corporations join8 ing in the filing of a consolidated return).

9 ‘‘SEC. 860K. DISQUALIFIED HOLDERS OF CERTAIN INTER10 ESTS.

11 ‘‘(a) CERTAIN TRANSFERS DISREGARDED.—

12 ‘‘(1) TRANSFERS TO DISQUALIFIED HOLD13 ERS.—The transfer or issuance of an ownership in14 terest or a permitted debt instrument to a disquali15 fied holder shall be disregarded for all Federal tax

16 purposes.

17 ‘‘(2) TRANSFERS OF NONECONOMIC OWNERSHIP

18 INTERESTS.—To the extent provided in regulations

19 (which, if issued with retroactive effect, shall be con20 sistent with the standards applicable to noneconomic

21 REMIC residual interests) the transfer or issuance

22 of a noneconomic ownership interest to any holder

23 shall be disregarded for all Federal tax purposes if

24 a significant purpose of the transfer or issuance was
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1 to enable the transferor or issuer to impede the as2 sessment or collection of tax.

3 ‘‘(3) CONSEQUENCES OF DISREGARDING CER4 TAIN EVENTS.—

5 ‘‘(A) TRANSFERS.—If this subsection ap6 plies to a transfer, the transferor shall remain

7 liable for any taxes due with respect to the

8 transferred security.

9 ‘‘(B) ISSUANCES OF OWNERSHIP INTER10 ESTS.—If this subsection applies to the issu11 ance of an ownership interest, all other owner12 ship interests whose issuance is not disregarded

13 under this subsection shall be treated as rep14 resenting ownership of a proportionate share of

15 the ownership interest whose issuance is dis16 regarded. If at the time of such issuance there

17 are no other outstanding ownership interests

18 whose issuance is not disregarded, the issuing

19 entity shall not qualify as a FASIT.

20 ‘‘(b) TREATMENT OF PASS-THRU ENTITIES.—

21 ‘‘(1) IMPOSITION OF TAX.—If, at any time dur22 ing any taxable year of a pass-thru entity, a dis23 qualified holder is the record holder of an interest in

24 such entity there is hereby imposed on such entity

25 for such taxable year a tax equal to the product of—
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1 ‘‘(A) the highest rate of tax specified in

2 section 11(b)(1), multiplied by,

3 ‘‘(B) the portion of the taxable income of

4 such entity, allocable to the interest held by

5 such disqualified holder, that is attributable to

6 the pass-thru entity’s ownership (directly or

7 through one or more pass-thru entities) of any

8 FASIT ownership interests or permitted debt

9 instruments.

10 Any tax imposed by this subsection shall, for pur11 poses of this title (other than this section), be ap12 plied against (and operate to reduce) the amount in13 cluded in gross income by the pass-thru entity with

14 respect to the security involved.

15 ‘‘(2) EXCEPTIONS.—Notwithstanding the pre16 ceding paragraph, no tax shall be imposed by para17 graph (1)—

18 ‘‘(A) CERTAIN BUSINESS LOAN

19 SECURITIZATIONS.—If the security held by the

20 pass-thru entity represents a retained economic

21 interest in debt obligations originated by the en22 tity in connection with its sale of goods or serv23 ices.

24 ‘‘(B) DEALERS.—If the pass-thru entity

25 holds the security for sale to customers in the
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1 ordinary course of business (and promptly iden2 tifies it as such upon its acquisition), or is a

3 dealer in securities and holds such security for

4 no more than one month.

5 ‘‘(C) WHERE HOLDER FURNISHES AFFIDA6 VIT.—With respect to any interest in a pass7 thru entity if—

8 ‘‘(i) the record holder of such interest

9 furnishes to the pass-thru entity an affida10 vit that such record holder is not a dis11 qualified holder, and

12 ‘‘(ii) during such period, the pass-thru

13 entity does not have actual knowledge that

14 such affidavit is false.

15 ‘‘(3) ADMINISTRATIVE PROVISIONS.—For pur16 poses of subtitle F, the tax imposed by this sub17 section shall be treated as an excise tax with respect

18 to which the deficiency procedures of such subtitle

19 apply.

20 ‘‘(c) TREATMENT OF CERTAIN ARRANGEMENTS.—

21 ‘‘(1) SCOPE.—This subsection shall apply to

22 any pass-thru entity that issues any debt or equity

23 interests—

24 ‘‘(A) that are supported by any qualified

25 debt instruments having an original yield to
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1 maturity more than 2.5 percentage points above

2 the yield on comparable obligations of the Unit3 ed States, determined in the same manner as

4 under section 860L(e)(5), and

5 ‘‘(B) that would not qualify under section

6 860L(e)(5).

7 ‘‘(2) RECHARACTERIZATION OF DEBT.—If this

8 subsection applies, then solely for the purposes of

9 applying subsection (b)—

10 ‘‘(A) any qualified debt instruments de11 scribed in the preceding paragraph shall be

12 treated as permitted debt instruments, and

13 ‘‘(B) any debt instruments of the pass-thru

14 entity that are described in the preceding para15 graph shall be treated as equity interests in the

16 pass-thru entity.

17 ‘‘(3) ARRANGEMENTS TREATED AS PASS-THRU

18 ENTITIES.—Any arrangement formed or availed of

19 to divide FASIT debt instruments described in para20 graph (1)(A) into two or more classes of debt or eq21 uity interests, one or more of which would not qual22 ify under section 860L(e)(5), shall be treated as a

23 pass-thru entity for purposes of subsection (b) (even

24 if all of the interests corresponding to equity in the

25 arrangement are held by a single owner).
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1 SEC. 860L. DEFINITIONS AND OTHER RULES OF GENERAL

2 APPLICATION.

3 ‘‘For purposes of sections 860H through 860L (and

4 for other purposes as indicated)—

5 ‘‘(a) FASIT.—

6 ‘‘(1) IN GENERAL.—For purposes of this title,

7 the terms ‘‘financial asset securitization investment

8 trust’’ and ‘‘FASIT’’ shall mean any entity or ar9 rangement—

10 ‘‘(A) for which an election to be treated as

11 a FASIT applies for the taxable year and all

12 prior taxable years,

13 ‘‘(B) substantially all of the assets of

14 which, on the ninetieth day beginning with its

15 formation and at all times thereafter, consist of

16 permitted assets,

17 ‘‘(C) all of the interests in which are own18 ership interests, permitted debt instruments or

19 qualified debt instruments, and

20 ‘‘(D) which has one and only one class of

21 ownership interests.

22 ‘‘(2) INADVERTENT DISQUALIFICATIONS OF

23 FASITS.—Notwithstanding the preceding paragraph,

24 an entity’s failure to qualify or remain qualified as

25 a FASIT shall be disregarded if—
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1 ‘‘(A) the Secretary determines that the

2 event causing such failure was inadvertent and

3 was corrected within a reasonable time of its

4 discovery by the entity, and

5 ‘‘(B) the entity, and each person holding

6 an interest in the entity at any time during the

7 period commencing with the event causing such

8 failure, agrees to make such adjustments as

9 may be required by the Secretary with respect

10 to such period.

11 ‘‘(b) PERMITTED ASSETS.—Permitted assets shall

12 mean any—

13 ‘‘(1) cash or cash items,

14 ‘‘(2) debt obligations (but, to the extent pro15 vided in regulations, only if any coupons thereon

16 representing rights to contingent interest to which

17 the provisions of section 871(h)(4)(A) would apply

18 are not held by the FASIT),

19 ‘‘(3) property that was security for a debt obli20 gation held by the FASIT and that was acquired in

21 connection with the default or imminent default of

22 such debt obligation but only if—

23 ‘‘(A) the security interest in such property

24 was not created for the principal purpose of
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1 permitting the FASIT to invest in such prop2 erty,

3 ‘‘(B) such debt obligation was not acquired

4 by the FASIT for the principal purpose of ac5 quiring such property, and

6 ‘‘(C) such property would be in compliance

7 with the limitations of paragraphs (2) and (3)

8 of section 856(e) (without regard to the provi9 sions of section 856(e)(5) and, except in the

10 case of real property, without regard to the pro11 visions of section 856(e)(4)) if the FASIT were

12 a real estate investment trust,

13 ‘‘(4) any instrument or contract in the nature

14 of a hedge or guarantee (including, but not limited

15 to, interest rate swaps, credit enhancements, mini16 mum and maximum prepayment guarantees, cur17 rency fluctuation hedges, and liquidity arrange18 ments) against the risk that payments on debt obli19 gations held by the FASIT would not be sufficient

20 to fund timely payments on debt instruments issued

21 by the FASIT (whether or not a portion of the pay22 ments received on such instruments or contracts are

23 incidentally payable to holders of ownership inter24 ests),
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1 ‘‘(5) to the extent permitted in regulations,

2 ownership interests in other FASITs, and

3 ‘‘(6) contract rights to acquire any assets de4 scribed in this paragraph.

5 ‘‘(c) DEBT OBLIGATION.—

6 ‘‘(1) IN GENERAL.—A debt obligation shall

7 mean any evidence of indebtedness.

8 ‘‘(2) EXAMPLES.—Such term shall include (but

9 not be limited to)—

10 ‘‘(A) any trade or service receivable which

11 entitles the holder to a fixed amount, and

12 ‘‘(B) any participation interest (or similar

13 interest) in an evidence of indebtedness (with14 out regard to any characteristics of such inter15 est that would not cause it to be classified as

16 other than an interest in a fixed investment

17 trust).

18 ‘‘(d) DEBT INSTRUMENT.—A debt instrument shall

19 mean any qualified debt instrument or permitted debt in20 strument.

21 ‘‘(e) QUALIFIED DEBT INSTRUMENT.—A qualified

22 debt instrument shall mean any instrument issued by a

23 FASIT that is designated as such (regardless of its form)

24 if—
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1 ‘‘(1) it unconditionally entitles the holder to re2 ceive a specified principal amount (or other similar

3 amount),

4 ‘‘(2) its interest payments (or other similar

5 amounts), if any, are based on one or more rates

6 (including combinations and variations of rates that

7 would be permitted interest payments for a REMIC

8 regular interest under section 860G(a)(1)(B)) that

9 are fixed or whose variations can reasonably be ex10 pected to measure contemporaneous variations in the

11 cost of newly borrowed funds in the currency in

12 which the instrument is denominated,

13 ‘‘(3) it does not have a stated maturity greater

14 than 30 years (or such longer period as may be per15 mitted by regulations),

16 ‘‘(4) its issue price does not exceed 125 percent

17 of its stated principal amount, and

18 ‘‘(5) it does not have a yield to maturity (deter19 mined, except as otherwise provided by regulations,

20 as of the issuance date based on issue price or pric21 ing date based on a reasonable estimate of the issue

22 price, and based on a reasonable prepayment as23 sumption for the FASIT’s assets) that is more than

24 five percentage points higher than the yield to matu25 rity on outstanding marketable obligations of the
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1 United States with a comparable maturity (based

2 upon a statistically significant sampling, a published

3 index, or a similar objective determination).

4 ‘‘(f) PERMITTED DEBT INSTRUMENT.—A permitted

5 debt instrument shall mean any instrument issued by a

6 FASIT that is designated as such (regardless of its form),

7 and that is described in paragraphs (1), (2), (3) and (4)

8 of the preceding subsection.

9 ‘‘(g) OWNERSHIP INTEREST.—An ownership interest

10 shall mean any interest issued by a FASIT that is des11 ignated as such (regardless of its form).

12 ‘‘(h) FASIT SECURITY.—A FASIT security shall

13 mean any ownership interest or debt instrument issued by

14 a FASIT.

15 ‘‘(i) PASS-THRU ENTITY.—A ‘pass-thru entity’ shall

16 mean—

17 ‘‘(1) any regulated investment company, real

18 estate investment trust, or common trust fund,

19 ‘‘(2) any partnership, trust, or estate,

20 ‘‘(3) any organization to which part I of sub21 chapter T applies, and

22 ‘‘(4) any S corporation.

23 Except as provided in regulations, a person holding an in24 terest in a pass-thru entity as a nominee for another per-
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1 son shall, with respect to such interest, be treated as a

2 pass-thru entity.

3 ‘‘(j) DISQUALIFIED HOLDER.—A disqualified holder

4 shall mean any holder other than a pass-thru entity or

5 a corporation that is not exempt from corporate income

6 taxation and that is a United States person (or, to the

7 extent provided in regulations, that is otherwise subject

8 to United States tax on the income with respect to its own9 ership interests or permitted debt instruments).

Æ

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