26 U.S.C. § 860F — Other rules

(a) 100-percent tax on prohibited transactions. (1) Each tax year, a REMIC owes tax equal to 100 percent of its net income from prohibited transactions. (2) A “prohibited transaction” is: (A) disposing of a qualified mortgage^* transferred to the REMIC, except for (i) substituting a qualified replacement mortgage^* or repurchasing a defective obligation instead, (ii) a disposition connected with foreclosure, default, or imminent default, (iii) REMIC bankruptcy or insolvency, or (iv) a qualified liquidation; (B) receiving income from an asset that is neither a qualified mortgage nor a permitted investment; (C) receiving a service fee or other service compensation; or (D) gaining from disposing of a cash-flow investment other than in a qualified liquidation. (3) Net income is prohibited-transaction gross income minus directly connected deductions allowed by this chapter, but items from a prohibited transaction that produced a loss are ignored. (4)(A) A qualified liquidation requires a complete-liquidation plan, sale of all assets except cash during the liquidation period, and crediting or distributing all proceeds plus cash, minus assets retained for claims, to regular or residual holders by the last day. (B) The liquidation period starts when the plan is adopted and ends at the close of the 90th day after that date. (5) A disposition is not prohibited under (A) or (D) if required to prevent default on a regular interest^* caused by default on one or more qualified mortgages, or if it facilitates a regulatory clean-up call. (b) Transfers to a REMIC. (1)(A) A transferor recognizes no gain or loss when transferring property to a REMIC for regular or residual interests. (B) The interests' total adjusted basis equals the transferred property's total adjusted basis and is allocated among the interests according to their fair market values. (C) If issue price exceeds basis, the excess is included during the transferor's holding period (or a later holder's period when basis derives from the transferor): for a regular interest, as gross income under rules like section 1276(b); for a residual interest^*, ratably over the expected REMIC life. (D) If basis exceeds issue price, the excess is deductible during that period: for a regular interest under rules like section 171; for a residual interest ratably over the expected REMIC life. (2) The REMIC's basis in received property is its fair market value immediately after transfer. (c) Property distributions. When a REMIC distributes property on a regular or residual interest, it recognizes gain as if it sold the property to the recipient at fair market value, and the recipient's basis is fair market value. (d) Wash sales. For section 1091, every REMIC residual interest is a security. For a claimed loss on its sale, regulations may treat residual interests in any REMIC and comparable taxable-mortgage-pool interests as substantially identical securities; sections 1091(a) and (e) use six months instead of 30 days. (e) Subtitle F. A REMIC is treated as a partnership^* and residual holders as partners. A required return must include section 860E(c) daily accruals, and the REMIC files it; who may sign is decided without the first sentence of this subsection.