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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as ‘‘The FASIT Provisions of
1993’’.
SEC. 2. FINANCIAL ASSET SECURITIZATION INVESTMENT
TRUST.
(a) The heading and table of sections of part II of
subchapter M of chapter 1 of the Internal Revenue Code
of 1986, relating to real estate investment trusts in
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 own-
ership 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.’’
(b) The title of part II in the table of parts of sub-
chapter M of chapter 1 of the Internal Revenue Code of
1986 is amended to read as follows:
‘‘PART II. Investment Trusts.’’
(c) The following new sections are added to part II
of subchapter M of chapter 1 of the Internal Revenue
Code of 1986:
‘‘SEC. 855A. FINANCIAL ASSET SECURITIZATION INVEST-
MENT TRUSTS.
‘‘(a) DEFINITION.—For purposes of this title, the
term ‘financial asset securitization investment trust’ and
‘FASIT’ mean any entity or arrangement—
‘‘(1) for which an election to be treated as a
FASIT is in effect for the taxable year and all pre-
ceding taxable years,
‘‘(2) which has a taxable year which is a cal-
ender year,
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‘‘(3) substantially all of the assets of which, as
of the close of the second calendar quarter following
its formation and each calender quarter ending
thereafter, consist of—
‘‘(A) money or debt obligations,
‘‘(B) property acquired in connection with
the default or imminent default of a debt obli-
gation held by a FASIT (but only if such prop-
erty would be in compliance with the limitations
of paragraphs (2) and (3) of section 856(e) if
the FASIT were a real estate investment trust),
‘‘(C) instruments or contractual rights in
the nature of a hedge or guarantee against the
economic risks associated with debts issued or
held by the FASIT (including, but not limited
to, interest rate swaps, credit enhancement, and
liquidity arrangements), or
‘‘(D) ownership interests in other FASITs,
‘‘(4) the governing documents of which pro-
hibit—
‘‘(A) the acquisition or disposition of as-
sets other than in accordance with the terms
and conditions set forth in the agreements, in-
dentures, or other instruments pursuant to
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which its qualified debt instruments and owner-
ship interests are issued,
‘‘(B) the acquisition or disposition of as-
sets for the primary purpose of recognizing
gains or decreasing losses resulting from mar-
ket value changes, and
‘‘(C) the acquisition of any debt obligation
for the primary purpose of realizing income
from the operation, management, rental, leas-
ing, or sale of property acquired or to be ac-
quired in connection with the default or immi-
nent default thereof,
‘‘(5) which has one and only one class of com-
mon ownership interests,
‘‘(6) which (except as otherwise provided by
regulations) has no ownership interests other than
common ownership interests and preferred owner-
ship interests, and
‘‘(7) with respect to which there are reasonable
arrangements designed to ensure that its ownership
interests are held exclusively by—
‘‘(A) corporations to which the provisions
of section 11 apply,
‘‘(B) other FASITs, or
‘‘(C) pass-through entities.
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‘‘(b) CLASSIFICATION AND TAXATION OF FASITS.—
‘‘(1) GENERAL RULE.—A FASIT shall not be
subject to taxation under this subtitle (and shall not
be treated as a corporation, partnership, or trust)
except to the extent the FASIT (or a portion there-
of) is classified as a corporation by section 7701(i).
‘‘(2) DETERMINATION
AND
ALLOCATION
OF
FASIT INCOME.—The taxable income of a FASIT
shall be determined in the same manner as for a
corporation. The constant yield method and the
principles of section 1722(a)(6) shall be applied in
determining all interest and discount income, and all
premium deductions or adjustments, with respect to
all debt obligations held by the FASIT.
‘‘(3) TAXATION OF HOLDERS OF OWNERSHIP
INTERESTS.—The holder of an ownership interest in
a FASIT shall take into account its daily portion of
the amount of FASIT taxable income (or net loss)
allocable to ownership interests of the same class for
each day during the taxable year on which such
holder held such interest. The daily portion shall be
determined—
‘‘(A) by allocating to each day in any cal-
endar quarter its ratable portion of the amount
of taxable income (or net loss) for such quarter
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allocable to such class of ownership interests,
and
‘‘(B) by dividing the amounts so allocated
to any day among the holders (on such day) of
ownership interests of such class in proportion
to their respective holdings on such day.
‘‘(4) AMOUNTS
ALLOCABLE
TO
CLASSES
OF
OWNERSHIP INTERESTS.—
‘‘(A) FASIT taxable income, to the extent
thereof, shall be allocated to any outstanding
classes of preferred ownership interests, in
order of their respective preferences, in the
same manner that interest and original issue
discount income would accrue on a debt instru-
ment having the same terms. Any remaining
FASIT taxable income shall be allocated to the
class of common ownership interests.
‘‘(B) FASIT net losses shall be allocated
first to the class of common ownership interests
until the basis of all such ownership interests
(determined as if held by the original holders)
is reduced to zero. Any remaining net losses
shall be allocated to any outstanding classes of
preferred ownership interests in accordance
with their terms and priorities until the basis of
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all such ownership interests (determined as if
held by the original holders) is reduced to zero.
Any remaining net losses shall be allocable to
the class of common ownership interests.
‘‘(5) DISTRIBUTIONS.—Any distribution by a
FASIT with respect to an ownership interest—
‘‘(A) shall not be included in gross income
to the extent it does not exceed the adjusted
basis of the interest, and
‘‘(B) to the extent it exceeds the adjusted
basis of the interest, shall be treated as gain
from the sale or exchange of such interest.
‘‘(6) BASIS RULES.—The basis of any person’s
ownership interest in a FASIT shall be increased by
the amount of any taxable income, and decreased
(but not below zero) by the amount of any loss,
taken into account under paragraph (3) of this sub-
section by such person with respect to such interest.
Such basis shall also be increased by any contribu-
tions and decreased (but not below zero) by any dis-
tributions to such person with respect to such inter-
est.
‘‘(7) SPECIAL RULES.—
‘‘(A) AMOUNT TREATED AS ORDINARY.—
Any amount taken into account under para-
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graph (3) of this subsection shall be treated as
ordinary income or ordinary loss, as the case
may be.
‘‘(B) 
LIMITATION
ON
LOSSES.—The
amount of the net loss of any FASIT taken into
account by any holder under paragraph (3) of
this subsection with respect to any calendar
quarter shall not exceed the adjusted basis of
the holder’s ownership interest in such FASIT
as of the close of such calendar quarter (deter-
mined without regard to any basis reduction for
net losses taken into account by such holder for
such quarter). Any loss disallowed by the pre-
ceding sentence shall be treated as incurred by
the FASIT in the succeeding calendar quarter
with respect to such holder.
‘‘(C) PREMIUM
AND
DISCOUNT.—Except
as otherwise provided in regulations, any
amount by which a holder’s basis in an owner-
ship interest differs from the basis determined
as if held by the original holder shall be taken
into account on a constant yield method.
‘‘(8) Rules similar to those provided by section
860D(2)(B) shall apply to inadvertent failures to
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comply with the requirements for qualifying as a
FASIT.
‘‘(c) QUALIFIED DEBT INSTRUMENTS.—
‘‘(1) TREATMENT OF QUALIFIED DEBT INSTRU-
MENTS.—For purposes of this subtitle, a qualified
debt instrument issued by a FASIT shall be treated
as a debt obligation of the FASIT (and as a debt
obligation of a corporation) and not as an ownership
interest therein.
‘‘(2) DEFINITION.—A qualified debt instrument
is any instrument issued by a FASIT which is des-
ignated as a qualified debt instrument if—
‘‘(A) such instrument unconditionally enti-
tles the holder to receive a specified principal
amount (or other similar amount),
‘‘(B) interest payments (or other similar
amounts), if any, with respect to such instru-
ment are payable based on one or more rates
that, as of the date of issuance, are fixed or
qualify as permissible variable rates for pur-
poses of section 860G(a)(1)(B)(i),
‘‘(C) such instrument has a stated matu-
rity at issuance no longer than fifteen years,
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‘‘(D) the instrument’s issue price does not
exceed 125 percent of its stated principal
amount, and
‘‘(E) the instrument does not have a yield
to maturity as of the date of issuance that is
more than five percentage points higher than
the yield to maturity on outstanding marketable
obligations of the United States with a com-
parable maturity (based upon a statistically sig-
nificant sampling, a published index, or a simi-
lar objective determination).
‘‘(3) TREATMENT
OF
FORECLOSURE
PROP-
ERTY.—For purposes of the preceding paragraph,
principal on a debt instrument issued by a FASIT
shall not be considered to be unconditionally pay-
able, and interest on such a debt instrument shall
not be considered to be payable based on a fixed or
qualified variable rate, if payment of such amounts
is dependent upon the receipt of any payments from
the rental, lease, management or sale of any prop-
erty that was (1) acquired by the FASIT prior to
the issuance of such debt instrument in connection
with the default or imminent default of a debt obli-
gation held by a FASIT, or (2) acquired by the
FASIT at any time in connection with the default
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or imminent default of a debt obligation that was in
default or imminent risk of default at the time it
was acquired by the FASIT.
‘‘(4) STRIPPED INSTRUMENTS.—The trustee or
other fiduciary of a FASIT may separate rights to
principal and interest on any qualified debt instru-
ments issued by the FASIT and may issue certifi-
cates of ownership in such rights to the same extent
as would be permitted in the case of a fixed invest-
ment trust holding such qualified debt instruments.
All such rights arising out of the same qualified debt
instrument shall be treated by the FASIT as a sin-
gle qualified debt instrument.
‘‘(d) PREFERRED
OWNERSHIP
INTERESTS.—For
purposes of this section, a preferred ownership interest is
an instrument that—
‘‘(1) is designated as such,
‘‘(2) is described in subparagraphs (A), (B),
and (C) of paragraph (2) of the preceding sub-
section, and
‘‘(3) does not have an issue price in excess of
its stated principal amount.
‘‘(e) COMMON OWNERSHIP INTERESTS.—For pur-
poses of this section, a common ownership interest is an
instrument that is designated as such.
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‘‘SEC. 855B. TRANSFERS TO FASITS.
‘‘(a) TREATMENT OF TRANSFEROR.—
‘‘(1) RECOGNITION OF GAIN OR LOSS.—Gain or
loss shall be recognized to the transferor on the
transfer of any property to a FASIT in exchange for
an interest or instrument therein. Any increase in
the value of an existing interest or instrument held
by the transferor (or by a party bearing a relation-
ship to the transferor described in section 267(b) or
section 707(b)) attributable to the transfer of assets
shall be treated as the receipt of an additional inter-
est or instrument, as the case may be.
‘‘(2) ADJUSTED BASES.—The adjusted basis of
an interest or instrument received in a transfer de-
scribed in paragraph (1) shall be equal to its fair
market value immediately after such transfer.
‘‘(b) TREATMENT OF FASIT.—The basis of any prop-
erty received by a FASIT in a transfer described in sub-
section (a)(1) shall be its fair market value immediately
after such transfer.
‘‘(c) ACCOUNTING RULES.—For purposes of this
part—
‘‘(1) IN GENERAL.—The anticipated cash flows
and fair market value of assets transferred to a
FASIT shall be determined without regard to any
future transfers of assets that the transferor may be
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this subsection as attributable to a redemption and
new issuance of an allocable portion of all outstand-
ing interests and instruments.
‘‘(3) EXCEPTIONS.—Paragraph (1) shall not
apply (and appropriate basis adjustments shall be
required) with respect to amounts received—
‘‘(A) upon a sale or disposition that is of
a type which would not give rise to the recogni-
tion of gain, or the recognition or allowance of
loss, as the case may be, or
‘‘(B) upon a distribution with respect to an
interest or instrument of assets that are sub-
stantially identical to the assets transferred for
such interest or instrument.
‘‘(c) COORDINATION.—Following any application of
subsection (b), subsection (a) shall be applied disregarding
pro rata portions of subsequent actual and anticipated
principal payments to the FASIT to take into account the
amounts treated as principal payments in all prior applica-
tions of subsection (b).
‘‘(d) INVESTMENT PARTNERSHIP RULES APPLICA-
BLE.—Notwithstanding subsection (a), gain shall be taken
into account to the extent that would be required under
section 721(b) if the FASIT were a partnership (treating
as a single taxpayer all transferors that are members of
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the same affiliated group of corporations joining in the
filing of a consolidated return).
‘‘SEC. 855D. CONSISTENCY REQUIREMENT.
‘‘(a) ADOPTION OF METHOD OF ACCOUNTING.—Any
transfer of debt obligations to a FASIT in exchange for
an interest or instrument of the FASIT followed by the
retention by the transferor (or by a party bearing a rela-
tionship to the transferor described in section 267(b) or
section 707(b)) of any such interest or instrument for
more than three months, shall be treated as the adoption
by the transferor (and by all members of the same affili-
ated group of corporations joining in the filing of a con-
solidated return with the transferor) of a method of ac-
counting. Such method of accounting shall—
‘‘(1) apply to all gains and losses arising from
the transfer of substantially similar debt obligations
to entities described in subsection (b) in exchange
for interests in or obligations of such entities, and
‘‘(2) shall require gains and losses to be recog-
nized and taken into account (upon the later of the
transfer or the time at which the entity first be-
comes described in subsection (b)) in substantially
the same manner as if the transferee were a FASIT.
‘‘(b) ENTITIES.—An entity is described in this sub-
section if—
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‘‘(1) substantially all of its assets consist of
debt obligations, and
‘‘(2) the entity has outstanding instruments
treated as debt for Federal income tax purposes
(with an adjusted issue price exceeding 50 percent
of the adjusted basis of its assets) that are not
treated as debt on the consolidated financial state-
ment (or similar report or statement) of the trans-
feror for financial or regulatory accounting purposes.
‘‘(c) SCOPE
OF METHOD.—For purposes of sub-
section (a)(1) of this section, a debt obligation shall be
considered to be substantially similar to a debt obligation
transferred to a FASIT if such obligation is of a type that
was customarily treated (at the time of the transfer to
the FASIT) as an equivalent substitute for the debt obli-
gation transferred to the FASIT by buyers and sellers in
the markets for securities collateralized by such debt obli-
gations.
‘‘SEC. 855E. TREATMENT OF FRONT-LOADED INCOME ON
COMMON OWNERSHIP INTERESTS.
‘‘(a) FRONT-LOADED INCOME MAY NOT BE OFFSET
BY NET OPERATING LOSSES.—
‘‘(1) IN GENERAL.—Except as provided in para-
graphs (2) and (3), the taxable income of any holder
of a common ownership interest in a FASIT for any
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taxable year shall in no event be less than the front-
loaded income for such taxable year. For purposes of
the preceding sentence, all members of an affiliated
group filing a consolidated return shall be treated as
one taxpayer.
‘‘(2) EXCEPTION FOR CERTAIN STRUCTURES.—
Paragraph (1) shall not apply to any FASIT for any
periods during which—
‘‘(A) the debt obligations held by the
FASIT have an anticipated weighted average
life that is not greater than four years (deter-
mined at the end of each calendar quarter), or,
‘‘(B) under regulations, it can reasonably
be anticipated from the structure of the FASIT
that taxable income will not be required to be
included by the holders of common ownership
interests under section 855A(b)(3) materially
faster than would be required if the ownership
interests were subject to taxation under the
rules and principles applicable to debt obliga-
tions.
‘‘(3) EXCEPTION
FOR
BONA
FIDE
ORIGINA-
TORS.—Paragraph (1) shall not apply to any owner-
ship interest—
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‘‘(A) that is held by the originator of the
debt obligations transferred in exchange there-
for (or by a member of the same affiliated
group of corporations joining in the filing of a
consolidated return), and
‘‘(B) that represents a substantial eco-
nomic interest in the value or performance of
such debt obligations.
‘‘For purposes of the preceding sentence, an eco-
nomic interest is substantial if it is reasonably an-
ticipated to represent at least 2 percent of the value
of the debt obligations to which it relates for at least
half of their anticipated weighted average life.
‘‘(4) COORDINATION WITH SECTION 172.—For
purposes of section 172, front-loaded income for a
taxable year shall be treated in the same manner as
an excess inclusion is treated under section
860E(a)(5).
‘‘(b) FRONT LOADED INCOME.—For purposes of this
section, front-loaded income for the taxable year is the
amount (not less than zero) equal to—
‘‘(1) the taxable income taken into account by
the holder of a common ownership interest under
section 855A(b)(3) for the taxable year and for all
prior years, minus,
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‘‘(2) the amount that would have been required
to be taken into account by such holder for the tax-
able year and all prior years if the common owner-
ship interest were treated as a debt obligation (pro-
viding for the same fixed, variable, and contingent
cash flows as the common ownership interest) origi-
nally issued to the holder on the date of its acquisi-
tion for an amount equal to its fair market value on
that date, minus
‘‘(3) the amount determined under this sub-
section with respect to the holder for all years prior
to the taxable year.
To the extent the amount described in paragraph (2) re-
quires a determination of the yield to maturity of the hy-
pothetical debt obligation, such yield shall be considered
to be equal to 120 percent of the applicable Federal rate,
unless there is clear evidence that the amount would prop-
erly be determined using a higher yield.
‘‘SEC. 855F. TAX ON CERTAIN TRANSFERS OF OWNERSHIP
INTERESTS.
‘‘(a) IN GENERAL.—A tax is hereby imposed on any
transfer of an ownership interest in a FASIT other than
a transfer to a FASIT, to a pass-through entity, or to
a corporation to which the provision of section 11 apply.
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‘‘(b) AMOUNT OF TAX.—The amount of the tax im-
posed by subsection (a) on any transfer of an ownership
interest shall be equal to the product of—
‘‘(1) the fair market value of the ownership in-
terest on the date of transfer, multiplied by—
‘‘(2) the highest rate of tax specified in section
11(b)(1).
‘‘(c) LIABILITY.—The tax imposed by subsection (a)
on any transfer shall be paid by the transferor; except
that, where such transfer is through an agent for the
transferee, such tax shall be paid by such agent.
‘‘(d) TRANSFEREE
FURNISHES
AFFIDAVIT.—The
person otherwise liable for any tax imposed by subsection
(a) shall be relieved of liability for the tax imposed by sub-
section (a) with respect to any transfer if—
‘‘(1) the transferee furnishes to such person an
affidavit that the transferee is a FASIT, a pass-
through entity, or a corporation to which the provi-
sions of section 11 apply, and
‘‘(2) as of the time of the transfer, such person
does not have actual knowledge that such affidavit
is false.
‘‘(e) TREATMENT OF PASS-THROUGH ENTITIES.—If,
at any time during a taxable year of a pass-through entity,
the pass-through entity holds (directly or through one or