II 

109TH CONGRESS 

1ST SESSION S. 580 

To amend the Internal Revenue Code of 1986 to allow certain modifications 

to be made to qualified mortgages held by a REMIC or a grantor trust. 

IN THE SENATE OF THE UNITED STATES 

MARCH 9, 2005 

Mr. SMITH (for himself, Mr. CONRAD, Mr. STEVENS, Mr. HAGEL, and Mr. 

CHAFEE) introduced the following bill; which was read twice and referred 

to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 to allow certain modifications to be made to qualified mortgages 

held by a REMIC or a grantor trust. 

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

3 SECTION 1. CERTAIN MODIFICATIONS PERMITTED TO 

4 QUALIFIED MORTGAGES HELD BY A REMIC 

5 OR A GRANTOR TRUST. 

6 (a) QUALIFIED MORTGAGES HELD BY A REMIC.— 

7 (1) IN GENERAL.—Paragraph (3) of section 

8 860G(a) of the Internal Revenue Code of 1986 is 
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1 amended by adding at the end the following new 

2 subparagraph: 

3 ‘‘(C) QUALIFIED MODIFICATIONS.— 

4 ‘‘(i) IN GENERAL.—An obligation 

5 shall not fail to be treated as a qualified 

6 mortgage solely because of a qualified 

7 modification of such obligation. 

8 ‘‘(ii) QUALIFIED MODIFICATION.—For 

9 purposes of this section, the term ‘qualified 

10 modification’ means, with respect to any 

11 obligation, any amendment, waiver, or 

12 other modification which is treated as a 

13 disposition of such obligation under section 

14 1001 if such amendment, waiver or other 

15 modification does not— 

16 ‘‘(I) extend the final maturity 

17 date of the obligation, 

18 ‘‘(II) increase the outstanding 

19 principal balance under the obligation 

20 (other than the capitalization of ac21 crued, unpaid interest), 

22 ‘‘(III) result in a release of an in23 terest in real property securing the 

24 obligation such that the obligation is 

25 not principally secured by an interest 
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1 in real property (determined after giv2 ing effect to the release), or 

3 ‘‘(IV) result in an instrument or 

4 property right which is not debt for 

5 Federal income tax purposes. 

6 ‘‘(iii) DEFAULTS.—Under regulations 

7 prescribed by the Secretary, any amend8 ment, waiver, or other modification of an 

9 obligation which is in default or with re10 spect to which default is reasonably fore11 seeable may be treated as a qualified modi12 fication for purposes of this section. 

13 ‘‘(iv) DEFEASANCE WITH GOVERN14 MENT SECURITIES.—The requirements of 

15 clause (ii)(III) shall be treated as satisfied 

16 if, after the release described in such 

17 clause, the obligation is principally secured 

18 by Government securities and the amend19 ment, waiver, or other modification to such 

20 obligation satisfies such requirements as 

21 the Secretary may prescribe.’’. 

22 (2) EXCEPTION FROM PROHIBITED TRANS23 ACTION RULES.—Subparagraph (A) of section 

24 860F(a)(2) of such Code is amended— 
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1 (A) by striking ‘‘or’’ at the end of clause 

2 (iii); 

3 (B) by striking the period at the end of 

4 clause (iv) and inserting ‘‘or’’; and 

5 (C) by adding at the end the following new 

6 clause: 

7 ‘‘(v) a qualified modification (as de8 fined in section 860G(a)(3)(C)).’’. 

9 (3) CONFORMING AMENDMENTS.— 

10 (A) Section 860G(a)(3) of such Code is 

11 amended— 

12 (i) by redesignating clauses (i) and 

13 (ii) of subparagraph (A) as subclauses (I) 

14 and (II), respectively; 

15 (ii) by redesignating subparagraphs 

16 (A) through (D) as clauses (i) through 

17 (iv), respectively; 

18 (iii) by striking ‘The term’ and insert19 ing the following: 

20 ‘‘(A) IN GENERAL.—The term’’; and 

21 (iv) by striking ‘‘For purposes of sub22 paragraph (A)’’ and inserting the fol23 lowing: 
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1 ‘‘(B) TENANT-STOCKHOLDERS OF COOPER2 ATIVE HOUSING CORPORATIONS.—For purposes 

3 of subparagraph (A)(i)’’. 

4 (B) Section 860G(a)(3)(A)(iv) of such 

5 Code (as redesignated by subparagraph (A)) is 

6 amended— 

7 (i) by striking ‘‘clauses (i) and (ii) of 

8 subparagraph (A)’’ and inserting ‘‘sub9 clauses (I) and (II) of clause (i)’’; and 

10 (ii) by striking ‘‘subparagraph (A) 

11 (without regard to such clauses)’’ and in12 serting ‘‘clause (i) (without regard to such 

13 subclauses)’’. 

14 (b) QUALIFIED MORTGAGES HELD BY A GRANTOR

15 TRUST.—Section 672 of the Internal Revenue Code of 

16 1986 is amended by adding at the end the following new 

17 subsection: 

18 ‘‘(g) SPECIAL RULE FOR CERTAIN INVESTMENT

19 TRUSTS.—A grantor shall not fail to be treated as the 

20 owner of any portion of a trust under this subpart solely 

21 because such portion includes one or more obligations with 

22 respect to which a qualified modification (within the mean23 ing of section 860G(a)(3)(C)) has been, or may be, made 

24 under the terms of such trust.’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to amendments, waivers, and other 

3 modifications made after the date of enactment of this 

4 Act. 

Æ