26 U.S.C. § 860E: Treatment of income in excess of daily accruals on residual interests

The taxable income of any holder of a residual interest in a REMIC for any taxable year shall in no event be less than the excess inclusion for such taxable year. All members of an affiliated group filing a consolidated return shall be treated as 1 taxpayer for purposes of this subsection. in determining under section 172 the amount of any net operating loss for such taxable year, and in determining taxable income for such taxable year for purposes of subsection (a)(2)(B)(ii)(I) and the second sentence of subsection (b)(2) of section 172. the reference in section 55(b)(1)(D) to taxable income shall be treated as a reference to taxable income determined without regard to this subsection, the alternative minimum taxable income of any holder of a residual interest in a REMIC for any taxable year shall in no event be less than the excess inclusion for such taxable year, and any excess inclusion shall be disregarded for purposes of computing the alternative tax net operating loss deduction. If the holder of any residual interest in a REMIC is an organization subject to the tax imposed by section 511, the excess inclusion of such holder for any taxable year shall be treated as unrelated business taxable income of such holder for purposes of section 511. the amount taken into account with respect to such interest by the holder under section 860C(a), over the sum of the daily accruals with respect to such interest for days during such calendar quarter while held by such holder. the adjusted issue price of such interest at the beginning of such quarter, and 120 percent of the long-term Federal rate (determined on the basis of compounding at the close of each calendar quarter and properly adjusted for the length of such quarter). increased by the amount of daily accruals for prior quarters, and decreased (but not below zero) by any distribution made with respect to such interest before the beginning of such quarter. For purposes of this paragraph, the term “Federal long-term rate” means the Federal long-term rate which would have applied to the residual interest under section 1274(d) (determined without regard to paragraph (2) thereof) if it were a debt instrument. the aggregate excess inclusions determined with respect to such interests, over the real estate investment trust taxable income (within the meaning of section 857(b)(2), excluding any net capital gain), any amount allocated to a shareholder under paragraph (1) shall be treated as an excess inclusion with respect to a residual interest held by such shareholder. A tax is hereby imposed on any transfer of a residual interest in a REMIC to a disqualified organization. the amount (determined under regulations) equal to the present value of the total anticipated excess inclusions with respect to such interest for periods after such transfer, multiplied by the highest rate of tax specified in section 11(b). The tax imposed by paragraph (1) on any transfer shall be paid by the transferor; except that, where such transfer is through an agent for a disqualified organization, such tax shall be paid by such agent. the transferee furnishes to such person an affidavit that the transferee is not a disqualified organization, and as of the time of the transfer, such person does not have actual knowledge that such affidavit is false. the United States, any State or political subdivision thereof, any foreign government, any international organization, or any agency or instrumentality of any of the foregoing, any organization (other than a cooperative described in section 521) which is exempt from tax imposed by this chapter unless such organization is subject to the tax imposed by section 511, and any organization described in section 1381(a)(2)(C). the amount of excess inclusions for such taxable year allocable to the interest held by such disqualified organization, multiplied by the highest rate of tax specified in section 11(b). any regulated investment company, real estate investment trust, or common trust fund, any partnership, trust, or estate, and any organization to which part I of subchapter T applies. Any tax imposed by this paragraph with respect to any excess inclusion of any pass-thru entity for any taxable year shall, for purposes of this title (other than this subsection), be applied against (and operate to reduce) the amount included in gross income with respect to the residual interest involved. the record holder of such interest furnishes to such pass-thru entity an affidavit that such record holder is not a disqualified organization, and during such period, the pass-thru entity does not have actual knowledge that such affidavit is false. within a reasonable time after discovery that the transfer was subject to tax under paragraph (1), steps are taken so that the interest is no longer held by the disqualified organization, and there is paid to the Secretary such amounts as the Secretary may require. For purposes of subtitle F, the taxes imposed by this subsection shall be treated as excise taxes with respect to which the deficiency procedures of such subtitle apply. Except as provided in regulations, with respect to any variable contract (as defined in section 817), there shall be no adjustment in the reserve to the extent of any excess inclusion. The amendments made by subparagraphs (B) and (C) [amending this section and section 26 of this title ] (except to the extent they relate to paragraph (6) of section 860E(e) of the 1986 Code as added by such amendments) shall apply to transfers after March 31, 1988 ; except that such amendments shall not apply to any transfer pursuant to a binding written contract in effect on such date. allocable to an interest in a pass-thru entity acquired after March 31, 1988 , or allocable to an interest in a pass-thru entity acquired on or before March 31, 1988 , but attributable to a residual interest acquired by the pass-thru entity after March 31, 1988 . In the case of any real estate investment trust, regulated investment company, common trust fund, or publicly traded partnership, no tax shall be imposed under section 860E(e)(6) of the 1986 Code (as added by the amendment made by subparagraph (B)) for any taxable year beginning before January 1, 1989 .”