I

103D CONGRESS

1ST SESSION H. R. 2065

To facilitate the creation of Financial Asset Securitization Investment Trusts.

IN THE HOUSE OF REPRESENTATIVES

MAY 11, 1993

Mr. HOAGLAND (for himself and Mr. SHAW) introduced the following bill;

which was referred to the Committee on Ways and Means

A BILL

To facilitate 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 FASIT Provisions of

5 1993’’.

6 SEC. 2. FINANCIAL ASSET SECURITIZATION INVESTMENT

7 TRUST.

8 (a) The heading and table of sections of part II of

9 subchapter M of chapter 1 of the Internal Revenue Code

10 of 1986, relating to real estate investment trusts in

11 amended to read as follows:
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‘‘PART II—INVESTMENT TRUSTS

‘‘Sec. 855A. Financial asset securitization investment trusts.

‘‘Sec. 855B. Transfers to FASITs.

‘‘Sec. 855C. Treatment of recognized gains and losses.

‘‘Sec. 855D. Consistency requirement.

‘‘Sec. 855E. Treatment of front-loaded income on common ownership interests.

‘‘Sec. 855F. Tax on certain transfers of ownership interests.

‘‘Sec. 855G. Additional taxes.

‘‘Sec. 856. Definition of real estate investment trust.

‘‘Sec. 857. Taxation of real estate investment trusts and their

beneficiaries.

‘‘Sec. 858. Dividends paid by real estate investment trust after

close of taxable year.

‘‘Sec. 859. Adoption of annual accounting period.’’

1 (b) The title of part II in the table of parts of sub2 chapter M of chapter 1 of the Internal Revenue Code of

3 1986 is amended to read as follows:

‘‘PART II. Investment Trusts.’’

4 (c) The following new sections are added to part II

5 of subchapter M of chapter 1 of the Internal Revenue

6 Code of 1986:

7 ‘‘SEC. 855A. FINANCIAL ASSET SECURITIZATION INVEST8 MENT TRUSTS.

9 ‘‘(a) DEFINITION.—For purposes of this title, the

10 term ‘financial asset securitization investment trust’ and

11 ‘FASIT’ mean any entity or arrangement—

12 ‘‘(1) for which an election to be treated as a

13 FASIT is in effect for the taxable year and all pre14 ceding taxable years,

15 ‘‘(2) which has a taxable year which is a cal16 ender year,
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1 ‘‘(3) substantially all of the assets of which, as

2 of the close of the second calendar quarter following

3 its formation and each calender quarter ending

4 thereafter, consist of—

5 ‘‘(A) money or debt obligations,

6 ‘‘(B) property acquired in connection with

7 the default or imminent default of a debt obli8 gation held by a FASIT (but only if such prop9 erty would be in compliance with the limitations

10 of paragraphs (2) and (3) of section 856(e) if

11 the FASIT were a real estate investment trust),

12 ‘‘(C) instruments or contractual rights in

13 the nature of a hedge or guarantee against the

14 economic risks associated with debts issued or

15 held by the FASIT (including, but not limited

16 to, interest rate swaps, credit enhancement, and

17 liquidity arrangements), or

18 ‘‘(D) ownership interests in other FASITs,

19 ‘‘(4) the governing documents of which pro20 hibit—

21 ‘‘(A) the acquisition or disposition of as22 sets other than in accordance with the terms

23 and conditions set forth in the agreements, in24 dentures, or other instruments pursuant to
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1 which its qualified debt instruments and owner2 ship interests are issued,

3 ‘‘(B) the acquisition or disposition of as4 sets for the primary purpose of recognizing

5 gains or decreasing losses resulting from mar6 ket value changes, and

7 ‘‘(C) the acquisition of any debt obligation

8 for the primary purpose of realizing income

9 from the operation, management, rental, leas10 ing, or sale of property acquired or to be ac11 quired in connection with the default or immi12 nent default thereof,

13 ‘‘(5) which has one and only one class of com14 mon ownership interests,

15 ‘‘(6) which (except as otherwise provided by

16 regulations) has no ownership interests other than

17 common ownership interests and preferred owner18 ship interests, and

19 ‘‘(7) with respect to which there are reasonable

20 arrangements designed to ensure that its ownership

21 interests are held exclusively by—

22 ‘‘(A) corporations to which the provisions

23 of section 11 apply,

24 ‘‘(B) other FASITs, or

25 ‘‘(C) pass-through entities.
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1 ‘‘(b) CLASSIFICATION AND TAXATION OF FASITS.—

2 ‘‘(1) GENERAL RULE.—A FASIT shall not be

3 subject to taxation under this subtitle (and shall not

4 be treated as a corporation, partnership, or trust)

5 except to the extent the FASIT (or a portion there6 of) is classified as a corporation by section 7701(i).

7 ‘‘(2) DETERMINATION AND ALLOCATION OF

8 FASIT INCOME.—The taxable income of a FASIT

9 shall be determined in the same manner as for a

10 corporation. The constant yield method and the

11 principles of section 1722(a)(6) shall be applied in

12 determining all interest and discount income, and all

13 premium deductions or adjustments, with respect to

14 all debt obligations held by the FASIT.

15 ‘‘(3) TAXATION OF HOLDERS OF OWNERSHIP

16 INTERESTS.—The holder of an ownership interest in

17 a FASIT shall take into account its daily portion of

18 the amount of FASIT taxable income (or net loss)

19 allocable to ownership interests of the same class for

20 each day during the taxable year on which such

21 holder held such interest. The daily portion shall be

22 determined—

23 ‘‘(A) by allocating to each day in any cal24 endar quarter its ratable portion of the amount

25 of taxable income (or net loss) for such quarter
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1 allocable to such class of ownership interests,

2 and

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

4 to any day among the holders (on such day) of

5 ownership interests of such class in proportion

6 to their respective holdings on such day.

7 ‘‘(4) AMOUNTS ALLOCABLE TO CLASSES OF

8 OWNERSHIP INTERESTS.—

9 ‘‘(A) FASIT taxable income, to the extent

10 thereof, shall be allocated to any outstanding

11 classes of preferred ownership interests, in

12 order of their respective preferences, in the

13 same manner that interest and original issue

14 discount income would accrue on a debt instru15 ment having the same terms. Any remaining

16 FASIT taxable income shall be allocated to the

17 class of common ownership interests.

18 ‘‘(B) FASIT net losses shall be allocated

19 first to the class of common ownership interests

20 until the basis of all such ownership interests

21 (determined as if held by the original holders)

22 is reduced to zero. Any remaining net losses

23 shall be allocated to any outstanding classes of

24 preferred ownership interests in accordance

25 with their terms and priorities until the basis of
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1 all such ownership interests (determined as if

2 held by the original holders) is reduced to zero.

3 Any remaining net losses shall be allocable to

4 the class of common ownership interests.

5 ‘‘(5) DISTRIBUTIONS.—Any distribution by a

6 FASIT with respect to an ownership interest—

7 ‘‘(A) shall not be included in gross income

8 to the extent it does not exceed the adjusted

9 basis of the interest, and

10 ‘‘(B) to the extent it exceeds the adjusted

11 basis of the interest, shall be treated as gain

12 from the sale or exchange of such interest.

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

14 ownership interest in a FASIT shall be increased by

15 the amount of any taxable income, and decreased

16 (but not below zero) by the amount of any loss,

17 taken into account under paragraph (3) of this sub18 section by such person with respect to such interest.

19 Such basis shall also be increased by any contribu20 tions and decreased (but not below zero) by any dis21 tributions to such person with respect to such inter22 est.

23 ‘‘(7) SPECIAL RULES.—

24 ‘‘(A) AMOUNT TREATED AS ORDINARY.—

25 Any amount taken into account under para-
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1 graph (3) of this subsection shall be treated as

2 ordinary income or ordinary loss, as the case

3 may be.

4 ‘‘(B) LIMITATION ON LOSSES.—The

5 amount of the net loss of any FASIT taken into

6 account by any holder under paragraph (3) of

7 this subsection with respect to any calendar

8 quarter shall not exceed the adjusted basis of

9 the holder’s ownership interest in such FASIT

10 as of the close of such calendar quarter (deter11 mined without regard to any basis reduction for

12 net losses taken into account by such holder for

13 such quarter). Any loss disallowed by the pre14 ceding sentence shall be treated as incurred by

15 the FASIT in the succeeding calendar quarter

16 with respect to such holder.

17 ‘‘(C) PREMIUM AND DISCOUNT.—Except

18 as otherwise provided in regulations, any

19 amount by which a holder’s basis in an owner20 ship interest differs from the basis determined

21 as if held by the original holder shall be taken

22 into account on a constant yield method.

23 ‘‘(8) Rules similar to those provided by section

24 860D(2)(B) shall apply to inadvertent failures to
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1 comply with the requirements for qualifying as a

2 FASIT.

3 ‘‘(c) QUALIFIED DEBT INSTRUMENTS.—

4 ‘‘(1) TREATMENT OF QUALIFIED DEBT INSTRU5 MENTS.—For purposes of this subtitle, a qualified

6 debt instrument issued by a FASIT shall be treated

7 as a debt obligation of the FASIT (and as a debt

8 obligation of a corporation) and not as an ownership

9 interest therein.

10 ‘‘(2) DEFINITION.—A qualified debt instrument

11 is any instrument issued by a FASIT which is des12 ignated as a qualified debt instrument if—

13 ‘‘(A) such instrument unconditionally enti14 tles the holder to receive a specified principal

15 amount (or other similar amount),

16 ‘‘(B) interest payments (or other similar

17 amounts), if any, with respect to such instru18 ment are payable based on one or more rates

19 that, as of the date of issuance, are fixed or

20 qualify as permissible variable rates for pur21 poses of section 860G(a)(1)(B)(i),

22 ‘‘(C) such instrument has a stated matu23 rity at issuance no longer than fifteen years,
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1 ‘‘(D) the instrument’s issue price does not

2 exceed 125 percent of its stated principal

3 amount, and

4 ‘‘(E) the instrument does not have a yield

5 to maturity as of the date of issuance that is

6 more than five percentage points higher than

7 the yield to maturity on outstanding marketable

8 obligations of the United States with a com9 parable maturity (based upon a statistically sig10 nificant sampling, a published index, or a simi11 lar objective determination).

12 ‘‘(3) TREATMENT OF FORECLOSURE PROP13 ERTY.—For purposes of the preceding paragraph,

14 principal on a debt instrument issued by a FASIT

15 shall not be considered to be unconditionally pay16 able, and interest on such a debt instrument shall

17 not be considered to be payable based on a fixed or

18 qualified variable rate, if payment of such amounts

19 is dependent upon the receipt of any payments from

20 the rental, lease, management or sale of any prop21 erty that was (1) acquired by the FASIT prior to

22 the issuance of such debt instrument in connection

23 with the default or imminent default of a debt obli24 gation held by a FASIT, or (2) acquired by the

25 FASIT at any time in connection with the default
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1 or imminent default of a debt obligation that was in

2 default or imminent risk of default at the time it

3 was acquired by the FASIT.

4 ‘‘(4) STRIPPED INSTRUMENTS.—The trustee or

5 other fiduciary of a FASIT may separate rights to

6 principal and interest on any qualified debt instru7 ments issued by the FASIT and may issue certifi8 cates of ownership in such rights to the same extent

9 as would be permitted in the case of a fixed invest10 ment trust holding such qualified debt instruments.

11 All such rights arising out of the same qualified debt

12 instrument shall be treated by the FASIT as a sin13 gle qualified debt instrument.

14 ‘‘(d) PREFERRED OWNERSHIP INTERESTS.—For

15 purposes of this section, a preferred ownership interest is

16 an instrument that—

17 ‘‘(1) is designated as such,

18 ‘‘(2) is described in subparagraphs (A), (B),

19 and (C) of paragraph (2) of the preceding sub20 section, and

21 ‘‘(3) does not have an issue price in excess of

22 its stated principal amount.

23 ‘‘(e) COMMON OWNERSHIP INTERESTS.—For pur24 poses of this section, a common ownership interest is an

25 instrument that is designated as such.
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1 ‘‘SEC. 855B. TRANSFERS TO FASITS.

2 ‘‘(a) TREATMENT OF TRANSFEROR.—

3 ‘‘(1) RECOGNITION OF GAIN OR LOSS.—Gain or

4 loss shall be recognized to the transferor on the

5 transfer of any property to a FASIT in exchange for

6 an interest or instrument therein. Any increase in

7 the value of an existing interest or instrument held

8 by the transferor (or by a party bearing a relation9 ship to the transferor described in section 267(b) or

10 section 707(b)) attributable to the transfer of assets

11 shall be treated as the receipt of an additional inter12 est or instrument, as the case may be.

13 ‘‘(2) ADJUSTED BASES.—The adjusted basis of

14 an interest or instrument received in a transfer de15 scribed in paragraph (1) shall be equal to its fair

16 market value immediately after such transfer.

17 ‘‘(b) TREATMENT OF FASIT.—The basis of any prop18 erty received by a FASIT in a transfer described in sub19 section (a)(1) shall be its fair market value immediately

20 after such transfer.

21 ‘‘(c) ACCOUNTING RULES.—For purposes of this

22 part—

23 ‘‘(1) IN GENERAL.—The anticipated cash flows

24 and fair market value of assets transferred to a

25 FASIT shall be determined without regard to any

26 future transfers of assets that the transferor may be
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1 obligated or permitted to make. Any such subse2 quent transfer shall be treated as a separate trans3 fer of assets with respect to which there shall be sep4 arately computed—

5 ‘‘(A) the FASIT’s basis therein and in6 come thereon, and

7 ‘‘(B) any gain or loss to the transferor.

8 ‘‘(2) TREATMENT OF REVOLVING LOAN

9 POOLS.—In the case of any FASIT acquiring obliga10 tions representing extensions of credit on revolving

11 loan accounts having substantially the same terms—

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

13 treated as a separate obligation transferred to

14 the FASIT,

15 ‘‘(B) the anticipated life of each such obli16 gation shall be determined using a periodic

17 principal payment rate equal to the reasonably

18 anticipated periodic rate (determined at the

19 time of transfer) at which principal payments

20 on the accounts will be paid, as a proportion of

21 their outstanding principal balance, and

22 ‘‘(C) actual payments of principal (and

23 losses of principal) shall be allocated among all

24 outstanding obligations in proportion to their

25 outstanding balances.
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1 ‘‘(d) DISTRIBUTIONS OF PROPERTY.—Any distribu2 tion of property with respect to an interest or instrument

3 of a FASIT (other than a distribution described in section

4 855C(b)(3)(B)) shall be treated as if the FASIT had sold

5 such property and distributed the proceeds.

6 ‘‘(e) TREATMENT OF RECOGNIZED GAINS AND

7 LOSSES.—Recognized gains and losses attributable to

8 transfers described in paragraph (a)(1) shall be taken into

9 account by the transferor in the manner prescribed in sec10 tion 855C.

11 ‘‘(f) BELOW-MARKET LOANS.—For purposes of sub12 section (a) (relating to the recognition of gain or loss upon

13 the transfer of property to a FASIT) and subsection (b)

14 (relating to the FASIT’s basis in such property), the fair

15 market value of any loan that was a below-market loan

16 when made (within the meaning of section 7872(e)(1))

17 shall not be considered to be less than the lower of its

18 outstanding principal amount or the transferor’s adjusted

19 basis therein.

20 ‘‘SEC. 855C. TREATMENT OF RECOGNIZED GAINS AND

21 LOSSES.

22 ‘‘(a) RETAINED INTERESTS AND INSTRUMENTS.—

23 Subject to subsections (b) and (c), gain (or loss) recog24 nized on a transfer described in section 855B(a)(1) shall

25 be taken into account in the same manner as the same
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1 amount of premium (or discount) on the transferred as2 sets would be required to be taken into account by the

3 FASIT.

4 ‘‘(b) ACCELERATION OF GAIN OR LOSS UPON SALE

5 OF INTERESTS AND INSTRUMENTS.—

6 ‘‘(1) IN GENERAL.—Amounts received by the

7 transferor with respect to the sale or other disposi8 tion of any FASIT interest or instrument (including

9 any amounts treated as received with respect to the

10 allocable portion of any interests or instruments is11 sued directly by the FASIT)—

12 ‘‘(A) shall be allocated among the out13 standing assets that were transferred by the

14 transferor in transactions to which section

15 855B(a)(1) applied (but not in excess of the

16 outstanding principal amount of any such as17 sets determined after prior applications of this

18 paragraph), and

19 ‘‘(B) shall be treated (solely for purposes

20 of subsection (a)) as a payment of principal re21 ceived by the FASIT on such assets.

22 ‘‘(2) DEEMED RECEIPTS.—Amounts of prin23 cipal received by a FASIT and used to acquire new

24 debt obligations in a transfer to which section

25 855B(a)(1) applies shall be treated for purposes of
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1 this subsection as attributable to a redemption and

2 new issuance of an allocable portion of all outstand3 ing interests and instruments.

4 ‘‘(3) EXCEPTIONS.—Paragraph (1) shall not

5 apply (and appropriate basis adjustments shall be

6 required) with respect to amounts received—

7 ‘‘(A) upon a sale or disposition that is of

8 a type which would not give rise to the recogni9 tion of gain, or the recognition or allowance of

10 loss, as the case may be, or

11 ‘‘(B) upon a distribution with respect to an

12 interest or instrument of assets that are sub13 stantially identical to the assets transferred for

14 such interest or instrument.

15 ‘‘(c) COORDINATION.—Following any application of

16 subsection (b), subsection (a) shall be applied disregarding

17 pro rata portions of subsequent actual and anticipated

18 principal payments to the FASIT to take into account the

19 amounts treated as principal payments in all prior applica20 tions of subsection (b).

21 ‘‘(d) INVESTMENT PARTNERSHIP RULES APPLICA22 BLE.—Notwithstanding subsection (a), gain shall be taken

23 into account to the extent that would be required under

24 section 721(b) if the FASIT were a partnership (treating

25 as a single taxpayer all transferors that are members of
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1 the same affiliated group of corporations joining in the

2 filing of a consolidated return).

3 ‘‘SEC. 855D. CONSISTENCY REQUIREMENT.

4 ‘‘(a) ADOPTION OF METHOD OF ACCOUNTING.—Any

5 transfer of debt obligations to a FASIT in exchange for

6 an interest or instrument of the FASIT followed by the

7 retention by the transferor (or by a party bearing a rela8 tionship to the transferor described in section 267(b) or

9 section 707(b)) of any such interest or instrument for

10 more than three months, shall be treated as the adoption

11 by the transferor (and by all members of the same affili12 ated group of corporations joining in the filing of a con13 solidated return with the transferor) of a method of ac14 counting. Such method of accounting shall—

15 ‘‘(1) apply to all gains and losses arising from

16 the transfer of substantially similar debt obligations

17 to entities described in subsection (b) in exchange

18 for interests in or obligations of such entities, and

19 ‘‘(2) shall require gains and losses to be recog20 nized and taken into account (upon the later of the

21 transfer or the time at which the entity first be22 comes described in subsection (b)) in substantially

23 the same manner as if the transferee were a FASIT.

24 ‘‘(b) ENTITIES.—An entity is described in this sub25 section if—
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1 ‘‘(1) substantially all of its assets consist of

2 debt obligations, and

3 ‘‘(2) the entity has outstanding instruments

4 treated as debt for Federal income tax purposes

5 (with an adjusted issue price exceeding 50 percent

6 of the adjusted basis of its assets) that are not

7 treated as debt on the consolidated financial state8 ment (or similar report or statement) of the trans9 feror for financial or regulatory accounting purposes.

10 ‘‘(c) SCOPE OF METHOD.—For purposes of sub11 section (a)(1) of this section, a debt obligation shall be

12 considered to be substantially similar to a debt obligation

13 transferred to a FASIT if such obligation is of a type that

14 was customarily treated (at the time of the transfer to

15 the FASIT) as an equivalent substitute for the debt obli16 gation transferred to the FASIT by buyers and sellers in

17 the markets for securities collateralized by such debt obli18 gations.

19 ‘‘SEC. 855E. TREATMENT OF FRONT-LOADED INCOME ON

20 COMMON OWNERSHIP INTERESTS.

21 ‘‘(a) FRONT-LOADED INCOME MAY NOT BE OFFSET

22 BY NET OPERATING LOSSES.—

23 ‘‘(1) IN GENERAL.—Except as provided in para24 graphs (2) and (3), the taxable income of any holder

25 of a common ownership interest in a FASIT for any
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1 taxable year shall in no event be less than the front2 loaded income for such taxable year. For purposes of

3 the preceding sentence, all members of an affiliated

4 group filing a consolidated return shall be treated as

5 one taxpayer.

6 ‘‘(2) EXCEPTION FOR CERTAIN STRUCTURES.—

7 Paragraph (1) shall not apply to any FASIT for any

8 periods during which—

9 ‘‘(A) the debt obligations held by the

10 FASIT have an anticipated weighted average

11 life that is not greater than four years (deter12 mined at the end of each calendar quarter), or,

13 ‘‘(B) under regulations, it can reasonably

14 be anticipated from the structure of the FASIT

15 that taxable income will not be required to be

16 included by the holders of common ownership

17 interests under section 855A(b)(3) materially

18 faster than would be required if the ownership

19 interests were subject to taxation under the

20 rules and principles applicable to debt obliga21 tions.

22 ‘‘(3) EXCEPTION FOR BONA FIDE ORIGINA23 TORS.—Paragraph (1) shall not apply to any owner24 ship interest—
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1 ‘‘(A) that is held by the originator of the

2 debt obligations transferred in exchange there3 for (or by a member of the same affiliated

4 group of corporations joining in the filing of a

5 consolidated return), and

6 ‘‘(B) that represents a substantial eco7 nomic interest in the value or performance of

8 such debt obligations.

9 ‘‘For purposes of the preceding sentence, an eco10 nomic interest is substantial if it is reasonably an11 ticipated to represent at least 2 percent of the value

12 of the debt obligations to which it relates for at least

13 half of their anticipated weighted average life.

14 ‘‘(4) COORDINATION WITH SECTION 172.—For

15 purposes of section 172, front-loaded income for a

16 taxable year shall be treated in the same manner as

17 an excess inclusion is treated under section

18 860E(a)(5).

19 ‘‘(b) FRONT LOADED INCOME.—For purposes of this

20 section, front-loaded income for the taxable year is the

21 amount (not less than zero) equal to—

22 ‘‘(1) the taxable income taken into account by

23 the holder of a common ownership interest under

24 section 855A(b)(3) for the taxable year and for all

25 prior years, minus,
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1 ‘‘(2) the amount that would have been required

2 to be taken into account by such holder for the tax3 able year and all prior years if the common owner4 ship interest were treated as a debt obligation (pro5 viding for the same fixed, variable, and contingent

6 cash flows as the common ownership interest) origi7 nally issued to the holder on the date of its acquisi8 tion for an amount equal to its fair market value on

9 that date, minus

10 ‘‘(3) the amount determined under this sub11 section with respect to the holder for all years prior

12 to the taxable year.

13 To the extent the amount described in paragraph (2) re14 quires a determination of the yield to maturity of the hy15 pothetical debt obligation, such yield shall be considered

16 to be equal to 120 percent of the applicable Federal rate,

17 unless there is clear evidence that the amount would prop18 erly be determined using a higher yield.

19 ‘‘SEC. 855F. TAX ON CERTAIN TRANSFERS OF OWNERSHIP

20 INTERESTS.

21 ‘‘(a) IN GENERAL.—A tax is hereby imposed on any

22 transfer of an ownership interest in a FASIT other than

23 a transfer to a FASIT, to a pass-through entity, or to

24 a corporation to which the provision of section 11 apply.
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1 ‘‘(b) AMOUNT OF TAX.—The amount of the tax im2 posed by subsection (a) on any transfer of an ownership

3 interest shall be equal to the product of—

4 ‘‘(1) the fair market value of the ownership in5 terest on the date of transfer, multiplied by—

6 ‘‘(2) the highest rate of tax specified in section

7 11(b)(1).

8 ‘‘(c) LIABILITY.—The tax imposed by subsection (a)

9 on any transfer shall be paid by the transferor; except

10 that, where such transfer is through an agent for the

11 transferee, such tax shall be paid by such agent.

12 ‘‘(d) TRANSFEREE FURNISHES AFFIDAVIT.—The

13 person otherwise liable for any tax imposed by subsection

14 (a) shall be relieved of liability for the tax imposed by sub15 section (a) with respect to any transfer if—

16 ‘‘(1) the transferee furnishes to such person an

17 affidavit that the transferee is a FASIT, a pass18 through entity, or a corporation to which the provi19 sions of section 11 apply, and

20 ‘‘(2) as of the time of the transfer, such person

21 does not have actual knowledge that such affidavit

22 is false.

23 ‘‘(e) TREATMENT OF PASS-THROUGH ENTITIES.—If,

24 at any time during a taxable year of a pass-through entity,

25 the pass-through entity holds (directly or through one or
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1 more other pass-through entities) an ownership interest

2 in a FASIT and a record holder of an interest in the pass3 through entity is neither a corporation to which the provi4 sions of section 11 apply, a FASIT, nor another pass5 through entity, there is hereby imposed on the pass6 through entity a tax, for the taxable year, equal to the

7 product of—

8 ‘‘(1) the amount of taxable income for such tax9 able year attributable to the FASIT ownership inter10 est held (directly or through one or more other pass11 through entities) and allocable to the pass-through

12 interest held by such record holder, multiplied by

13 ‘‘(2) the highest rate of tax specified in section

14 11(b)(1).

15 ‘‘(f) PASS-THROUGH ENTITY.—For purposes of this

16 section, the term ‘pass-through entity’ has the same mean17 ing as that provided in section 860E(e)(6), except that

18 such term shall also include S corporations.

19 ‘‘(g) EXCEPTIONS.—No tax shall be imposed by sub20 section (e) to the extent a pass-through entity—

21 ‘‘(1) holds an ownership interest in a FASIT

22 representing a retained economic interest in debt ob23 ligations originated by the pass-through entity in

24 connection with the pass-through entity’s sale of

25 goods or services, or
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1 ‘‘(2) holds an ownership interest in a FASIT

2 for sale to customers in the ordinary course of busi3 ness, or is a dealer in securities and holds an owner4 ship interest in a FASIT for no more than one

5 month.

6 ‘‘(h) EXCEPTION WHERE HOLDER FURNISHES AFFI7 DAVIT.—No tax shall be imposed by subsection (e) with

8 respect to any interest in a pass-through entity for any

9 period if—

10 ‘‘(1) the record holder of such interest furnishes

11 to such pass-through entity an affidavit that such

12 record holder is a FASIT, a corporation to which

13 the provisions of section 11 apply, or another pass14 through entity, and

15 ‘‘(2) during such period, the pass-through en16 tity receiving the affidavit does not have actual

17 knowledge that such affidavit is false.

18 ‘‘(i) WAIVER.—The Secretary may waive the tax im19 posed by subsection (a) on any transfer if—

20 ‘‘(1) within a reasonable time after discovery

21 that the transfer was subject to tax under subsection

22 (a) steps are taken so that the interest is no longer

23 held by the prohibited holder, and

24 ‘‘(2) there is paid to the Secretary such

25 amounts as the Secretary may require.
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1 ‘‘(j) ADMINISTRATIVE PROVISIONS.—For purposes of

2 subtitle F, the taxes imposed by this section shall be treat3 ed as excise taxes with respect to which the deficiency pro4 cedures of such subtitle apply.

5 ‘‘SEC. 855G. ADDITIONAL TAXES.

6 ‘‘(a) PROHIBITED TRANSACTION TAX.—

7 ‘‘(1) IMPOSITION OF TAX.—A tax is hereby im8 posed for each taxable year of a FASIT equal to 100

9 percent of the net income derived from prohibited

10 transactions (disregarding any losses from prohib11 ited transactions).

12 ‘‘(2) PROHIBITED TRANSACTION.—For pur13 poses of this subsection, the term ‘prohibited trans14 action’ means—

15 ‘‘(A) any acquisition or disposition of as16 sets other than in accordance with the terms

17 and conditions set forth in the agreements, in18 dentures, or other instruments pursuant to

19 which its qualified debt instruments and owner20 ship interests are issued,

21 ‘‘(B) any acquisition or disposition of as22 sets for the primary purpose of recognizing

23 gains or decreasing losses resulting from mar24 ket value changes,
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1 ‘‘(C) any acquisition of a debt instrument

2 for the primary purpose of realizing income

3 from the operation, management, rental, leas4 ing, or sale of property acquired or to be ac5 quired in connection with the default or immi6 nent default thereof, and

7 ‘‘(D) the receipt of any income attributable

8 to an asset which is not described in section

9 855A(a)(3).

10 ‘‘(b) TAX ON INCOME FROM FORECLOSURE PROP11 ERTY.—

12 ‘‘(1) IN GENERAL.—A tax is hereby imposed for

13 each taxable year on the net income from foreclosure

14 property of each FASIT. Such tax shall be computed

15 by multiplying the net income from foreclosure prop16 erty by the highest rate of tax specified in section

17 11(b).

18 ‘‘(2) NET INCOME FROM FORECLOSURE PROP19 ERTY.—For purposes of this part, the term ‘net in20 come from foreclosure property’ means the amount

21 which would be the FASIT’s net income from fore22 closure property under section 857(b)(4)(B) if the

23 FASIT were a real estate investment trust and all

24 property acquired by the FASIT in connection with

25 the default or imminent default of a debt obligation
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1 were treated as if it were real property and as if it

2 were foreclosure property.’’

3 SEC. 3. CONFORMING AMENDMENTS.

4 (a) The last sentence of paragraph (1) of section

5 582(c) of the Internal Revenue Code of 1986 is amended

6 to read as follows: ‘‘For purposes of the preceding sen7 tence, any regular or residual interest in a REMIC and

8 any ownership interest or qualified debt instrument issued

9 by a FASIT shall be treated as an evidence of indebted10 ness.’’

11 (b) Sections 593(d)(4), 856(c)(6)(E), and

12 7701(a)(19)(C) of the Internal Revenue Code of 1986, are

13 each amended by adding at the ends thereof the following

14 sentence: ‘‘The provisions of this section applicable to reg15 ular and residual interests in a REMIC shall also apply

16 to interests and instruments in a FASIT.’’

17 SEC. 4. EFFECTIVE DATE.

18 The amendments made by sections 2 and 3 shall be

19 effective upon the date of enactment.

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