26 U.S.C. § 860C — Taxation of residual interests

(a) Pass-through of income or loss. (1) For each day in the tax year that a person holds a REMIC residual interest, the person must include that day's share of the REMIC's taxable income or net loss. (2) To calculate the daily share, (A) divide each calendar quarter's income or loss equally among its days, then (B) divide each day's amount among that day's residual-interest holders according to their holdings. (b) Determining taxable income or net loss. (1) Taxable income is figured using accrual accounting and, unless regulations say otherwise, as for an individual, with these changes: (A) regular interests are treated as the REMIC's debt; (B) market discount on a market-discount bond is included in gross income for the proper years under section 1276(b)(2), and sections 1276(a) and 1277 do not apply; (C) income, gain, loss, or deduction from a prohibited transaction is ignored; (D) section 703(a)(2) deductions, other than a section 212 deduction, are not allowed; and (E) net income from foreclosure property is reduced by the tax under section 860G(c). (2) Net loss is the excess of allowable deductions over gross income, using those same changes. (c) Distributions. A REMIC distribution is not gross income to the extent it does not exceed the interest's adjusted basis. Any excess is gain from selling or exchanging the interest. (d) Basis. (1) A person's basis in a residual interest increases by the REMIC taxable income that person includes for it under (a). (2) Basis decreases, but not below zero, by (A) distributions on the interest and (B) the REMIC net loss included by that person under (a). (e) Special rules. (1) Amounts included under (a) are ordinary income or ordinary loss. (2)(A) A holder's quarterly REMIC loss cannot exceed the adjusted basis at the quarter's end, calculated before the decrease for that loss. (B) A disallowed loss is treated as incurred by the REMIC for that holder in the next quarter. (3) Section 860E covers income above daily accruals.