Limited partner’s distributive share. This ruling addresses whether a limited partner’s distributive share of interest expense attributable to indebtedness allocable to property held for investment described in section 163(d)(5)(A)(ii) of the Code is taken into account when determining the limited partner’s adjusted gross income. See Announcement 2008-65, in this Bulletin, for additional information. Rev. Rul. 2008-12 amplified.

Characterization of management fees. This ruling addresses the characterization of the management fees paid by an upper-tier investment partnership (UTP) and by lower-tier trader partnerships (LTPs) to their respective managers under sections 162 and 212 of the Code where the UTP’s activities consist solely of acquiring, holding, and disposing of interests in the LTPs and UTP’s management fee is not paid or incurred by UTP on behalf of any LTP in connection with the trades or businesses of the LTPs.

Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for August 2008.

Final, temporary, and proposed regulations under section 956 of the Code provide guidance to determine the basis in property acquired by a controlled foreign corporation as a result of certain transactions that otherwise qualify for nonrecognition treatment.

Final, temporary, and proposed regulations under section 956 of the Code provide guidance to determine the basis in property acquired by a controlled foreign corporation as a result of certain transactions that otherwise qualify for nonrecognition treatment.

This notice sets forth and requests comments on a proposed revenue ruling concerning the income, gift, estate, and generation-skipping transfer tax consequences in situations in which family members create a private trust company to serve as the trustee of trusts in which family members are grantors and beneficiaries.

This notice solicits comments on a proposal to require taxpayers to disclose to the IRS their groupings and regroupings of activities and the addition and disposition of specific activities within the chosen groupings of activities for purposes of section 469 of the Code and regulations section 1.469-4.

This notice provides for the suspension of certain requirements under section 42 of the Code for low-income housing credit projects in the United States in order to provide emergency housing relief needed as a result of the devastation caused by severe storms and flooding in Missouri beginning on June 1, 2008.

This procedure describes the conditions under which changes to certain subprime mortgage loans will not cause the Service to challenge the tax status of certain securitization vehicles holding the loans. Rev. Proc. 2007-72, 2007-52 I.R.B. 1257, provided similar guidance regarding fast-track loan modifications that were effected in a manner consistent with certain principles, recommendations, and guidelines (the “Framework”), which the American Securitization Forum (ASF) released on December 6, 2007. On July 8, 2008, the ASF released an updated Framework, which covers additional fast-track loan modifications. Rev. Proc. 2007-72 amplified and superseded.

This announcement clarifies that the limited partner described in Rev. Rul. 2008-12, 2008-10 I.R.B. 520, properly includes the allowable amount of his distributive share of the trading partnership’s interest expense in computing the limited partner’s ordinary business income or loss on Schedule E of the partner’s Form 1040. Rev. Rul. 2008-12 clarified.

This notice sets forth and requests comments on a proposed revenue ruling concerning the income, gift, estate, and generation-skipping transfer tax consequences in situations in which family members create a private trust company to serve as the trustee of trusts in which family members are grantors and beneficiaries.

This notice sets forth and requests comments on a proposed revenue ruling concerning the income, gift, estate, and generation-skipping transfer tax consequences in situations in which family members create a private trust company to serve as the trustee of trusts in which family members are grantors and beneficiaries.

(1) In the case of an individual, is interest paid or accrued on indebtedness allocable to property described in § 163(d)(5)(A)(ii) of the Internal Revenue Code deductible (after the application of the § 163(d)(1) limitation) in determining the taxpayer’s adjusted gross income or does the interest (after the application of the § 163(d)(1) limitation) instead constitute an itemized deduction?

(2) If an individual has both investment interest expense attributable to indebtedness allocable to property described in § 163(d)(5)(A)(ii) and investment interest expense attributable to indebtedness allocable to property described in § 163(d)(5)(A)(i) and the individual’s aggregate investment interest expense is greater than the individual’s net investment income, how does the individual determine the portion of the allowed investment interest deduction that is deductible in determining the taxpayer’s adjusted gross income and the portion that constitutes an itemized deduction?

Section 62(a) provides that the term “adjusted gross income” means, in the case of an individual taxpayer, gross income minus the deductions specified in § 62(a)(1) through (21).

Section 62(a)(1) provides that deductions allowed by chapter 1 of subtitle A, other than by part VII of subchapter B, which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee, are taken into account in determining the adjusted gross income of the taxpayer.

Section 63(d) defines the term “itemized deductions” as including all deductions allowable under chapter 1 of subtitle A other than deductions allowable in arriving at adjusted gross income and the deduction for personal exemptions provided in § 151.

Section 163(d)(1) provides that, in the case of a noncorporate taxpayer, the amount allowed as a deduction under chapter 1 of subtitle A for investment interest for any taxable year shall not exceed the amount of the taxpayer’s net investment income for the taxable year. Section 163(d)(2) provides that any amount not allowed as a deduction for a given taxable year by reason of § 163(d)(1) shall be treated as investment interest paid or accrued by the taxpayer in the next succeeding taxable year.

Section 163(d)(3)(A) provides that the term “investment interest” means any interest allowable as a deduction under chapter 1 of subtitle A (determined without regard to paragraph (1) of § 163(d)) which is paid or accrued on indebtedness properly allocable to property held for investment.

Section 702(a)(8) provides that, in determining the partner’s income tax, each partner shall take into account the partner’s distributive share of the partnership’s taxable income or loss, exclusive of the items requiring separate computation under § 702(a)(1) through (7). Section 702(a)(1) through (6) lists specific items of income, gain, loss, deduction or credit that must be separately stated by a partnership. Section 702(a)(7) provides that other items of income, gain, loss, deduction or credit also must be separately stated if required by regulations prescribed by the Secretary.

Section 702(b) provides that the character of any item of income, gain, loss, deduction, or credit included in a partner’s distributive share under paragraphs (1) through (7) of § 702(a) shall be determined as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership.

Section § 1.702-1(a)(8)(ii) of the Income Tax Regulations provides that each partner must take into account separately the partner’s distributive share of any partnership item that, if separately taken into account by the partner, would result in an income tax liability for that partner, or for any other person, different from that which would result if that partner did not take the item into account separately.

Section 706(a) provides that, in computing the taxable income of a partner for a taxable year, the inclusions required by § 702 and § 707(c) with respect to a partnership shall be based on the income, gain, loss, deduction, or credit of the partnership for any taxable year of the partnership ending within or with the taxable year of the partner.

Revenue Ruling 2008-12, 2008-10 I.R.B. 520, holds that, by virtue of the definition of the term “property held for investment” in § 163(d)(5)(A)(ii), a noncorporate limited partner’s distributive share of interest expense on indebtedness allocable to a partnership’s trade or business of trading securities for its own account constitutes investment interest described in § 163(d)(3) and is therefore subject to the limitation on the deduction of investment interest in § 163(d)(1), provided that the limited partner does not materially participate (as that term is used in § 469) in the trading activity. The ruling further holds that a partnership that engages in the trade or business of trading securities for its own account must separately state the amount of interest paid or accrued on indebtedness properly allocable to its trading activity because the degree of participation by each noncorporate partner of the partnership could limit the deductibility of such interest by the partner on his or her individual tax return.

Issue 1: In the case of an individual, interest paid or accrued on indebtedness allocable to property held for investment described in § 163(d)(5)(A)(ii) is (after the application of the § 163(d)(1) limitation) a deduction described in § 62(a)(1) and is therefore taken into account in determining the individual’s adjusted gross income.

Issue 2: If an individual has both investment interest expense attributable to indebtedness allocable to property described in § 163(d)(5)(A)(i) and investment interest expense attributable to indebtedness allocable to property described in § 163(d)(5)(A)(ii) and the individual’s aggregate investment interest expense is greater than the individual’s net investment income, the individual must allocate the individual’s net investment income between the two categories of investment interest expense using a reasonable method of allocation. One reasonable method of allocation is to allocate the individual’s net investment income to the two categories of investment interest in proportion to the relative amounts of interest expense within each category.

Rev. Rul. 2008-12 is amplified.

The principal author of this revenue ruling is Faith P. Colson of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue ruling, contact Faith P. Colson at (202) 622-3060 (not a toll-free call).

Under the facts described below, how are the management fees incurred by each of the lower tier partnerships (LTPs) and the management fee incurred by the upper tier partnership (UTP) taken into account in computing the tax liability of an individual who is a limited partner (LP) of UTP?

LP, an individual, owns a limited partnership interest in UTP. UTP owns limited partnership interests in several LTPs. Each LTP is engaged in the business of trading in securities and such business constitutes a trade or business within the meaning of § 162 of the Internal Revenue Code (Code). UTP’s activities consist solely of acquiring, holding, and disposing of interests in LTPs, and such activities, without regard to the activities of LTPs, do not constitute a trade or business within the meaning of § 162. Instead, UTP’s activities (without regard to the activities of LTPs) consist of holding limited partnership interests in LTPs for the production of income within the meaning of § 212. UTP and each LTP pay an annual management fee to their respective managers in consideration for management services performed for their benefit. Each management fee is computed as a specified percentage of the value of the net assets owned by UTP and each LTP, as the case may be.

The management fee paid or incurred by each LTP is an ordinary and necessary business expense within the meaning of § 162 in carrying on its trade or business. The management fee paid or incurred by UTP, without regard to the activities of LTP, is an ordinary and necessary expense in carrying on its investment activities. UTP’s management fee is not paid or incurred by UTP on behalf of any LTP in connection with an LTP’s trade or business. None of the management fees are properly capitalized under § 263.

Under the terms of the partnership agreement of each LTP, UTP receives a distributive share of the items of income, gain, loss, deduction and credit of each LTP. Under the terms of UTP’s partnership agreement, LP receives a distributive share of UTP’s items of income, gain, loss, deduction and credit.

Section 162(a) provides, in part, that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Section 212 provides that in the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year (1) for the production or collection of income, (2) for the management, conservation, or maintenance of property held for the production of income, or (3) in connection with the determination, collection, or refund of any tax.

Section 1.212-1(d) of the Income Tax Regulations provides that expenses, to be deductible under § 212, must be “ordinary and necessary.” Thus, such expenses must be reasonable in amount and must bear a reasonable and proximate relation to the production or collection of taxable income or to the management, conservation, or maintenance of property held for the production of income.

Section 1.212-1(g) provides that fees for services of investment counsel and similar expenses paid or incurred by a taxpayer in connection with investments held by the taxpayer are deductible under § 212 if they are paid or incurred for the production of income and they are ordinary and necessary under the circumstances.

Section 702(a)(8) provides that, in determining the partner’s income tax, each partner shall take into account the partner’s distributive share of the partnership’s taxable income or loss, exclusive of the items requiring separate computation under § 702(a)(1) through (7). Section 702(a)(1) through (6) lists specific items of income, gain, loss, deduction or credit that must be separately stated by a partnership. Section 702(a)(7) provides that other items of income, gain, loss, deduction or credit also must be separately stated if required by regulations prescribed by the Secretary.

Section 702(b) provides that the character of any item of income, gain, loss, deduction, or credit included in a partner’s distributive share under paragraphs (1) through (7) of § 702(a) shall be determined as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership.

Section 703(a) provides that the taxable income of a partnership shall be computed in the same manner as in the case of an individual, except that the items listed in § 702(a) shall be separately stated and the deductions listed in paragraph (2) of § 703(a) shall not be allowed.

Section 703(a)(2)(E) provides that the additional itemized deductions for individuals in part VII of subchapter B of the Code, including expenses described in § 212, are not allowed to the partnership.

Section 1.702-1(a)(1) through (a)(8)(i) lists specific items of income, gain, loss, deduction or credit that must be separately stated by a partnership. Specifically, § 1.702-1(a)(8)(i) provides, in part, that each partner shall take into account separately the partner’s distributive share of the partnership’s nonbusiness expenses that are described in § 212.

In Butler v. Commissioner, 36 T.C. 1097 (1961), acq., 1962-2 C.B. 4, the Tax Court held that, because loans made by a limited partner to a partnership were a vital factor in the existence and furtherance of the partnership’s business and were proximately related to the business activities of the partnership, the limited partner was entitled to a business bad debt deduction. The Tax Court noted its agreement with other cases that “[b]y reason of being a partner in a business petitioner was individually engaged in business.” 36 T.C. at 1106. Other courts have permitted a general partner to deduct as a trade or business expense amounts paid on behalf of the business of the partnership. In Ward v. Commissioner, 20 T.C. 332 (1953), acq., 1956-2 C.B. 9, aff’d, 224 F.2d 547 (9^th Cir. 1955), following the termination of a general partnership, a general partner paid medical expenses of a partnership employee. The court held that the partner was individually engaged in business by reason of being a partner. Because of the termination of the partnership, the fact that the partner was no longer in business at the time of the expense did not mean the deduction was denied. A similar result was reached in Flood v. United States, 133 F.2d 173 (1^st Cir. 1943).

In Goodwin v. Commissioner, 75 T.C. 424 (1980), aff’d, 691 F.2d 490 (3d Cir. 1982), the Tax Court concluded that, for the purpose of characterizing partnership expenses for purposes of § 162, a partnership must be viewed as a substantive economic entity clearly distinct from its partners. In Goodwin, the taxpayer was individually engaged in real estate activities and attempted to claim deductions under § 162(a) for his distributive share as a limited partner of certain startup costs incurred by two limited partnerships formed to construct housing projects. The taxpayer argued that his activities as a partner constituted an expansion or continuation of his existing trade or business. The Tax Court, citing Madison Gas and Electric Co. v. Commissioner, 72 T.C. 521 (1979), aff’d, 633 F.2d 512 (7^th Cir. 1980), held that in the context of § 162, the character of deductions incurred by the partnership, i.e., whether the deductions are incurred in the course of a trade or business, must be resolved at the partnership level. The partnership was not yet carrying on a trade or business at the time the startup costs were paid or incurred. Accordingly, the Tax Court determined that the taxpayer’s share of the startup costs were not deductible under § 162 regardless of the taxpayer’s individual activities.

The Tax Court in Goodwin distinguished the question of whether a partnership expense was an ordinary and necessary expense incurred in carrying on the trade or business of a partnership from the question of whether a partner may deduct unreimbursed amounts paid by the partner on behalf of the partnership. It was the latter question that the Tax Court concluded was the issue in Butler, Ward, and Flood. In Goodwin, the Tax Court interpreted Butler, Ward, and Flood to stand for the proposition that, under certain facts, a partner may be entitled to individually deduct under § 162 as an ordinary and necessary expense an amount paid by the partner on behalf of the partnership for which the partner is not reimbursed. See also Cropland Chemical v. Commissioner, 75 T.C. 288 (1980); Klein v. Commissioner, 25 T.C. 1045 (1956), acq., 1956-2 C.B. 6; and Rev. Rul. 70-253, 1970-1 C.B. 31.

UTP’s management fee is not an ordinary and necessary expense paid or incurred by UTP on behalf of the LTPs in carrying on the trading business of the LTPs. Thus, the reasoning and conclusions in Butler, Ward, and Flood are inapposite to the facts presented in this ruling.

Further, the reasoning and conclusions in Rev. Rul. 98-15, 1998-1 C.B. 718, do not apply to the question presented in this ruling. Rev. Rul. 98-15 addresses whether, under the facts described in that ruling, an organization that operates an acute care hospital continues to qualify for exemption from federal income tax as an organization described in § 501(c)(3) when it forms a limited liability company (LLC) with a for-profit corporation and then contributes its hospital and all of its other operating assets to the LLC, which then operates the hospital. The question addressed in Rev. Rul. 98-15 is distinguishable from the question presented in this ruling.

Accordingly, under Goodwin, the question of whether the management fee paid or incurred by UTP may be deducted under § 162 or § 212 must be resolved solely by reference to the activities of UTP. Because UTP itself is not engaged in a trade or business within the meaning of § 162 and because the management fee is not paid or incurred on behalf of any LTP in connection with an LTP’s trade or business, the management fee is not deductible under § 162. Instead, UTP’s annual management fees are ordinary and necessary expenses described in § 212 paid or incurred in connection with UTP’s investment activities. Accordingly, LP’s share of the UTP’s management fee is deductible under § 212. Pursuant to § 703(a)(2)(E), UTP does not take into account UTP’s management fees in computing UTP’s taxable income. Instead, § 1.702-1(8)(a)(i) requires that UTP separately state UTP’s management fees and that LP take into account separately LP’s distributive share of UTP’s management fees.

Because the management fee of each LTP is an ordinary and necessary expense paid or incurred in carrying on the trade or business of the LTP, the management fee is deductible under § 162. As a result, each LTP takes its management fee into account in computing its taxable income or loss described in § 702(a)(8), and UTP takes into account its distributive share of the taxable income or loss of each LTP in computing UTP’s own taxable income or loss described in § 702(a)(8). LP takes into account its distributive share of UTP’s taxable income or loss in computing LP’s tax liability.

UTP’s management fee is not an ordinary and necessary expense paid or incurred by UTP on behalf of the LTPs in carrying on their trading business. The management fee paid or incurred by UTP constitutes an expense described in § 212. This expense is not taken into account in computing UTP’s taxable income or loss described in § 702(a)(8). Instead, the management fee must be separately stated by UTP and separately taken into account by LP in computing LP’s tax liability.

The management fee paid or incurred by an LTP constitutes an expense described in § 162 and is taken into account in computing the LTP’s taxable income or loss described in § 702(a)(8). UTP’s distributive share of taxable income or loss of an LTP is taken into account in computing UTP’s taxable income or loss described in § 702(a)(8). In computing LP’s tax liability, LP takes into account LP’s distributive share of UTP’s taxable income or loss.

The principal author of this revenue ruling is Faith P. Colson of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue ruling, contact Faith P. Colson at (202) 622-3060 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Final and temporary regulations.

This document contains final and temporary regulations under section 956 of the Internal Revenue Code (Code) regarding the determination of basis in certain United States property (within the meaning of section 956(c) of the Code) acquired by a controlled foreign corporation in certain nonrecognition transactions that are intended to repatriate earnings and profits of the controlled foreign corporation without United States income taxation. The final regulation adds a cross reference to the temporary regulations. These regulations affect United States shareholders of a controlled foreign corporation that acquires United States property in certain nonrecognition transactions. The text of the temporary regulations serves as the text of the proposed regulations (REG-102122-08) set forth in the notice of proposed rulemaking published in this issue of the Bulletin.

Effective Date: These regulations are effective June 24, 2008.

Applicability Date: These regulations apply to property acquired in exchanges occurring on or after June 24, 2008.

John H. Seibert at (202) 622-3860 (not a toll-free number).

Accordingly, 26 CFR part 1 is amended as follows:

The principal author of these regulations is John H. Seibert, Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in their development.

* * * * *

This revenue ruling provides various prescribed rates for federal income tax purposes for August 2008 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.

(1) If the private trust company (PTC) described in Situation 1 or Situation 2 is appointed and serves as the trustee of a trust, will the value of the trust assets be included in a grantor’s gross estate under §§ 2036(a) or 2038(a)?

(2) If the PTC described in Situation 1 or Situation 2 is appointed and serves as the trustee of a trust, will the value of the trust assets be included in a beneficiary’s gross estate under § 2041?

(3) If the PTC described in Situation 1 or Situation 2 is appointed and serves as the trustee of a trust that provides the trustee with the discretionary power to distribute income and/or principal to the grantor’s child or descendants, will the grantor’s transfer to that trust constitute a completed gift?

(4) Does the appointment and service of a PTC as the trustee of a trust affect the exempt status of a trust that is otherwise exempt from the generation-skipping transfer (GST) tax under § 2601, or change the inclusion ratio of a trust?

(5) If the PTC described in Situation 1 or Situation 2 is appointed and serves as the trustee of a trust, is the grantor or any beneficiary of that trust treated as the owner of any portion of the trust under §§ 671 through 678?

A and B, who are husband and wife, have three children, C, D, and E. C, D, and E are each married, and each has children. References to Family include A, B, their children, the spouses and former spouses of their children, and each other descendant of A and B (both now living and future) and the spouses and former spouses of such descendants.

A and B have established separate irrevocable trusts for each of their children and grandchildren. In addition, C, D, and E have established irrevocable trusts for their respective descendants. Each child or grandchild of A and B is the primary beneficiary of the trust established for that child or grandchild. Each trust receives contributions only from the person who created the trust. All grantors and beneficiaries are United States persons and no trust is a foreign trust.

Each trust instrument provides the trustee with discretionary authority to distribute income and/or principal to the primary beneficiary of the trust during the primary beneficiary’s lifetime. In addition, each trust provides the primary beneficiary with the testamentary power to appoint the trust corpus to or for the benefit of one or more members of Family (other than the primary beneficiary) and/or one or more organizations described in §§ 170(c), 2055(a) and 2522(a) of the Internal Revenue Code. Each trust also provides that the grantor, or the primary beneficiary if the grantor is not living, may appoint a successor trustee other than himself or herself if the current trustee either resigns or is no longer able to fulfill the duties of trustee. Finally, each trust provides that the trust will terminate, in all events, no later than 21 years after the death of the last to die of certain designated individuals living at the time of the creation of the trust.

Situation 1 — PTC formed under laws of a state that has enacted a private trust company statute. The facts and the terms of the trusts are as described above. All trusts are governed by the laws of State 1, a state that has enacted a private trust company statute (Statute). Statute provides that any PTC formed under Statute must create a Discretionary Distribution Committee (DDC) and delegate to the DDC the exclusive authority to make all decisions regarding discretionary distributions from each trust for which it serves as trustee. Discretionary distributions are defined as permissible distributions that are not mandated in the trust instrument or by applicable law. Statute does not restrict who may serve on the DDC, but provides that no member of the DDC may participate in the activities of the DDC with regard to any trust of which that DDC member or his or her spouse is a grantor, or any trust of which that DDC member or his or her spouse is a beneficiary. In addition, Statute provides that a DDC member may not participate in the activities of the DDC with respect to any trust with a beneficiary to whom that DDC member or his or her spouse owes a legal obligation of support. Statute provides that only officers and managers of the PTC may participate in decisions regarding personnel of the PTC (including the hiring, discharge, promotion and compensation of employees). Statute also provides that nothing in Statute or in PTC’s governing documents may override a more restrictive provision in the trust instrument of a trust for which PTC is acting as a trustee. Finally, Statute provides that no Family member may enter into any reciprocal agreement, express or implied, regarding discretionary distributions from any trust for which PTC is serving as a trustee.

In 2008, Family formed a corporation that is a PTC under Statute. PTC’s governing documents create a DDC that will make all decisions with respect to discretionary distributions from all trusts for which it serves as trustee, consistent with Statute. PTC’s governing documents do not restrict who may serve on the DDC. Family owns all of the stock in PTC, either outright or through trusts and/or other entities. A, C, and D are officers of PTC and serve on PTC’s Board of Directors. A, C, and D also serve on the DDC. B and E own shares of PTC, but neither is on the DDC and neither is an officer or director of PTC. E is a manager and employee of PTC.

X, a financial institution organized under the banking laws of State 1, has served as trustee of each of the trusts since their inception. No grantor of any of the trusts has a relationship with X other than as a customer or client of X.

Subsequent to PTC’s formation, X resigned as trustee of each of the trusts and PTC was appointed as the successor trustee of each trust. In addition, A created and transferred property to three additional irrevocable trusts (the 2008 trusts), one for the primary benefit of each of A’s children, C, D, and E, and that child’s descendants. The terms of each of the 2008 trusts are the same as those described above, except that these trusts provide that the trustee has discretionary authority to distribute income and/or principal to any one or more beneficiaries during the beneficiary’s life. Each 2008 trust receives contributions only from A. PTC will serve as the initial trustee of each of the 2008 trusts.

Situation 2 — PTC formed in a state without a statute governing private trust companies. The facts and the terms of the trusts are as described above. In 2008, Family formed a corporation that is a PTC in State 2, a state that has not enacted specific legislation governing the formation or operation of a private trust company. PTC is established for the specific purpose of acting as the trustee for the various trusts established by members of Family. Family owns all of the stock in PTC, either outright or through trusts and/or other entities.

PTC’s governing documents create a DDC and delegate to the DDC the exclusive authority to make all decisions regarding discretionary distributions from each trust for which it serves as trustee. Discretionary distributions are defined as permissible distributions that are not mandated in the trust instrument or by applicable law. PTC’s governing documents do not restrict who may serve on the DDC, but provide that no member of the DDC may participate in the activities of the DDC with regard to any trust of which that DDC member or his or her spouse is a grantor, or any trust of which that DDC member or his or her spouse is a beneficiary. In addition, the governing documents provide that a DDC member may not participate in the activities of the DDC with respect to any trust with a beneficiary to whom that DDC member or his or her spouse owes a legal obligation of support. PTC’s governing documents also provide that only officers and managers of the PTC may participate in decisions regarding personnel of the PTC (including the hiring, discharge, promotion and compensation of employees). PTC’s governing documents also provide that nothing in PTC’s governing documents may override a more restrictive provision in the trust instrument of a trust for which PTC is acting as a trustee. In addition, PTC’s governing documents also provide that no Family member may enter into any reciprocal agreement, express or implied, regarding discretionary distributions from any trust for which PTC is serving as a trustee.

PTC’s governing documents also provide for the creation of an Amendment Committee, a majority of whose members must always be individuals who are neither Family members nor persons related or subordinate (as described in §672(c)) to any shareholder of PTC. The governing documents further provide that the Amendment Committee, by no less than majority vote, shall have the sole authority to make any changes to PTC’s governing documents regarding the creation, function, or membership of the DDC or of the Amendment Committee itself, the provisions delegating exclusive authority regarding personnel decisions to the officers and managers, and the prohibition of reciprocal agreements between Family members. The vesting of these powers exclusively in the Amendment Committee is not contrary to any applicable provision of the law of State 2. F, G, and A are the initial members of the Amendment Committee. F and G are not members of Family, are not employed by PTC, and are not otherwise related or subordinate to any Family member as defined in § 672(c).

A, C, and D are officers of PTC. A, C, D, F, and G serve on PTC’s Board of Directors. A, C, and D also serve on the DDC. B and E own shares of PTC, but neither is on the DDC and neither is an officer or director of PTC. E is a manager and employee of PTC.

X, a financial institution organized under the banking laws of State 2, has served as trustee of each of the trusts since their inception. No grantor of any of the trusts has a relationship with X other than as a customer or client of X.

Subsequent to PTC’s formation, X resigned as trustee of each of the trusts and PTC was appointed as the successor trustee of each trust. In addition, A created and transferred property to three additional irrevocable trusts (the 2008 trusts), one for the primary benefit of each of A’s children, C, D, and E, and that child’s descendants. The terms of each of the 2008 trusts are the same as those described above, except that these trusts provide that the trustee has discretionary authority to distribute income and/or principal to any one or more beneficiaries during the beneficiary’s life. Each 2008 trust receives contributions only from A. PTC will serve as the initial trustee of each of the 2008 trusts.

Under the facts set forth in Situation 1 and Situation 2:

(1) Neither the appointment nor the service of PTC as the trustee of a Family trust described in Situation 1 or Situation 2 will alone cause the value of the trust assets to be included in a grantor’s gross estate under §§ 2036(a) or 2038(a).

(2) Neither the appointment nor the service of PTC as the trustee of a Family trust described in Situation 1 or Situation 2 will alone cause the value of the trust assets to be included in a beneficiary’s estate under § 2041.

(3) Neither the appointment nor the service of PTC as the trustee of the trusts in which the trustee has the discretionary power to distribute income and/or principal to the grantor’s child or descendants in Situation 1 or Situation 2 will alone cause the grantor’s transfer to that trust to be deemed to be an incomplete gift under § 2511, or any distribution from the trust to be a gift by any DDC member.

(4) Neither the appointment nor the service of PTC as trustee of a Family trust in Situation 1 and Situation 2 will alone affect the exempt status of that trust if the trust is otherwise exempt from the GST tax under § 26.2601-1(b)(1)(i), or change the inclusion ratio of a trust.

(5) Neither the appointment nor the service of PTC as the trustee of a Family trust in either Situation 1 or Situation 2 will alone cause any grantor or beneficiary of that trust to be treated as the owner of that trust or any portion thereof under §§ 673, 676, 677, or 678. Whether any grantor is treated as an owner of the trust or any portion thereof under § 675 is a question of fact, the determination of which must be deferred until the federal income tax returns of the parties involved have been examined by the office with responsibility for such examination. Whether any grantor is treated as an owner of the trust or any portion thereof under § 674 will depend upon the particular powers of the trustee and may depend upon the proportion of the members of the DDC with authority to act with regard to that trust who are related or subordinate to the grantor. For purposes of this determination, the ownership of voting stock of PTC shall be deemed to be not significant under § 672(c).

The conclusions regarding the tax consequences of PTC as trustee of the Family trusts would not change even if (1) in Situation 2, F and/or G also serve on the Board of Directors, (2) any of the discretionary distributions are made pursuant to a reasonably definite external standard provided in the trust instrument; or (3) a single Family member was the sole owner of PTC. Distribution powers subject to such a standard would generally not cause the grantor or beneficiary to be treated as the owner of a trust or any portion of a trust under §§ 674 and 678, unless a grantor or spouse of a grantor is the trustee, regardless of the terms of Statute or the existence of the Amendment Committee.

The conclusions in Situation 1 and Situation 2 are otherwise limited to the facts of those situations. If the Statute in Situation 1 was changed, or if the Amendment Committee in Situation 2 exercised its powers to change the provisions regarding the DDC and/or the Amendment Committee itself, then the federal tax treatment of the Family trusts for which PTC acts as trustee, and/or the grantors and/or beneficiaries of those trusts, may be different from that described for Situation 1 and Situation 2.

The principal authors of this notice are Mary Berman and Bradford Poston of the Office of the Associate Chief Counsel (Passthroughs & Special Industries). However, other personnel from the IRS and the Treasury Department participated in its development. For further information regarding the estate, gift, and generation-skipping transfer tax issues, contact Ms. Berman at (202) 622-3090 (not a toll-free call); for further information regarding the income tax issues, contact Mr. Poston at (202) 622-3060 (not a toll-free call).

This notice requests comments from the public regarding a proposal to require taxpayers to report to the Internal Revenue Service their groupings and regroupings of activities and the addition and disposition of specific activities within their existing groupings of activities for purposes of § 469 of the Internal Revenue Code and § 1.469-4 of the Income Tax Regulations. To date, the IRS has not prescribed reporting requirements for taxpayer groupings under section 469 other than those provided for in § 1.469-9(g) (relating to the election available to certain real estate professionals). As a result, the IRS and taxpayers have had difficulty verifying taxpayers’ historical groupings. The proposal described in this notice would provide a reporting system that seeks to address this issue without unduly burdening taxpayers.

The proposal described in this notice is one possible approach. The IRS is interested in considering other possible approaches. Therefore, any requirement will not become effective until the IRS considers public comments and suggestions received in response to this notice and publishes final guidance announcing any new reporting rules.

Section 469 generally provides that deductions from passive trade or business activities, to the extent they exceed income from all such passive activities (exclusive of portfolio income), may not be deducted against other income.

Section 469(g)(1)(A) generally provides that if during the taxable year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), and all gain or loss realized on such disposition is recognized, the excess of (i) any loss from such activity for such taxable year (determined after the application of § 469(b)), over (ii) any net income or gain for such taxable year from all other passive activities (determined after the application of § 469(b)), shall be treated as a loss which is not from a passive activity.

Section 1.469-4 sets forth the rules for grouping a taxpayer’s trade or business activities and rental activities for purposes of applying the passive activity loss and credit limitation rules of § 469.

Section 1.469-4(c)(1) provides that one or more trade or business activities or rental activities may be treated as a single activity if the activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of § 469.

Section 1.469-4(c)(2) provides guidelines for determining whether activities constitute an appropriate economic unit and, therefore, may be treated as a single activity. Section 1.469-4(d) describes limitations on grouping certain activities.

Section 1.469-4(e)(1) provides that except as provided in § 1.469-4(e)(2) and § 1.469-11 (providing three periods of time, all of which are now closed, in which a taxpayer could have regrouped its activities without having to establish that the original grouping was clearly inappropriate under § 1.469-4(e)(2)), once a taxpayer has grouped activities under § 1.469-4, the taxpayer generally may not regroup those activities in subsequent taxable years. Taxpayers must comply with disclosure requirements that the Commissioner may prescribe with respect to both their original groupings and the addition and disposition of specific activities within those existing groupings in subsequent taxable years.

Section 1.469-4(e)(2) provides that if it is determined that a taxpayer’s original grouping was clearly inappropriate or a material change in the facts and circumstances has occurred that makes the original grouping clearly inappropriate, the taxpayer must regroup the activities and must comply with the disclosure requirements that the Commissioner may prescribe.

The IRS is considering whether to change the reporting requirements for taxpayer groupings under section 469. Although the Service has considered a number of approaches, the proposal described in paragraphs A through F would generally require taxpayers to report to the Service, as part of their regular annual return, changes to a taxpayer’s groupings. The proposal would apply to all persons or entities to whom the rules in § 1.469-4 apply. It would not apply to persons or entities who have made the election provided for in § 1.469-9(g) (relating to the election available to certain real estate professionals).

The proposal would be effective on the date that final guidance is published by the Internal Revenue Service.

The proposal contained in this notice is one way, but not the only way, to implement a reporting system for taxpayer groupings under section 469. The IRS requests public comments on this proposal and, specifically, whether it sufficiently balances the need for reporting with the burden of compliance. Comments regarding other possible approaches are also requested. All comments will be available for public inspection and copying. Therefore, submissions received by the IRS should not include taxpayer-specific information of a confidential nature. Submissions should include the name and telephone number of a person to contact. Comments must be submitted by November 4, 2008. Comments should be addressed to:

In addition, comments may be submitted electronically via the Internet by sending them in an email to notice.comments@irscounsel.treas.gov and specifying that the comments concern Notice 2008-64.

The principal author of this notice is Jonathan E. Cornwell of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice, contact Mr. Cornwell at (202) 622-3050 (not a toll-free call).

The Internal Revenue Service is suspending certain requirements under § 42 of the Internal Revenue Code for low-income housing credit projects in the United States to provide emergency housing relief needed as a result of the devastation caused by severe storms and flooding in Missouri beginning on June 1, 2008. This relief is being granted pursuant to the Service’s authority under § 42(n) and § 1.42-13(a) of the Income Tax Regulations.

On June 25, 2008, the President declared a major disaster for the State of Missouri. This declaration was made under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121-5206 (2000 and Supp. II 2002). Subsequently, the Federal Emergency Management Agency (FEMA) designated jurisdictions for Individual Assistance. The State of Missouri has requested that the Service allow owners of low-income housing credit projects to provide temporary housing in vacant units to individuals who resided in jurisdictions designated for Individual Assistance in Missouri and who have been displaced because their residences were destroyed or damaged as a result of the devastation caused by the severe storms and flooding. Based upon this request and because of the widespread damage to housing caused by the severe storms and flooding, the Service has determined that the Missouri Housing Development Commission (Commission) may provide approval to project owners to provide temporary emergency housing for displaced individuals in accordance with this notice.

The Service has determined that it is appropriate to temporarily suspend certain income limitation requirements under § 42 for certain qualified low-income projects. The suspension will apply to low-income housing projects approved by the Commission, in which vacant units are rented to displaced individuals. The Commission will determine the appropriate period of temporary housing for each project, not to extend beyond July 31, 2009 (temporary housing period).

A. Units in the first year of the credit period

A displaced individual temporarily occupying a unit during the first year of the credit period under § 42(f)(1) will be deemed a qualified low-income tenant for purposes of determining the project’s qualified basis under § 42(c)(1), and for meeting the project’s 20-50 test or 40-60 test as elected by the project owner under § 42(g)(1). After the end of the temporary housing period established by the Commission (not to extend beyond July 31, 2009), a displaced individual will no longer be deemed a qualified low-income tenant.

B. Vacant units after the first year of the credit period

During the temporary housing period established by the Commission, the status of a vacant unit (that is, market-rate or low-income for purposes of § 42 or never previously occupied) after the first year of the credit period that becomes temporarily occupied by a displaced individual remains the same as the unit’s status before the displaced individual moves in. Displaced individuals temporarily occupying vacant units will not be treated as low-income tenants under § 42(i)(3)(A)(ii). However, even if it houses a displaced individual, a low-income or market rate unit that was vacant before the effective date of this notice will continue to be treated as a vacant low-income or market rate unit. Similarly, a unit that was never previously occupied before the effective date of this notice will continue to be treated as a unit that has never been previously occupied even if it houses a displaced individual. Thus, the fact that a vacant unit becomes occupied by a displaced individual will not affect the building’s applicable fraction under § 42(c)(1)(B) for purposes of determining the building’s qualified basis, nor will it affect the 20-50 test or 40-60 test of § 42(g)(1). If the income of occupants in low-income units exceeds 140 percent of the applicable income limitation, the temporary occupancy of a unit by a displaced individual will not cause application of the available unit rule under § 42(g)(2)(D)(ii). In addition, the project owner is not required during the temporary housing period to make attempts to rent to low-income individuals the low-income units that house displaced individuals.

The non-transient use requirement of § 42(i)(3)(B)(i) shall not apply to any unit providing temporary housing to a displaced individual during the temporary housing period determined by the Commission in accordance with section I of this notice.

All other rules and requirements of § 42 will continue to apply during the temporary housing period established by the Commission. After the end of the temporary housing period, the applicable income limitations contained in § 42(g)(1), the available unit rule under § 42(g)(2)(D)(ii), the nontransient requirement of § 42(i)(3)(B)(i), and the requirement to make reasonable attempts to rent vacant units to low-income individuals shall resume. If a project owner offers to rent a unit to a displaced individual after the end of the temporary housing period, the displaced individual must be certified under the requirements of § 42(i)(3)(A)(ii) and § 1.42-5(b) and (c) to be a qualified low-income tenant. To qualify for the relief in this notice, the project owner must additionally meet all of the following requirements:

(1) Major Disaster Area

The displaced individual must have resided in a Missouri jurisdiction designated for Individual Assistance by FEMA as a result of the severe storms and flooding in Missouri beginning on June 1, 2008.

(2) Approval of the Missouri Housing Development Commission

The project owner must obtain approval from the Commission for the relief described in this notice. The Commission will determine the appropriate period of temporary housing for each project, not to extend beyond July 31, 2009.

(3) Certifications and Recordkeeping

To comply with the requirements of § 1.42-5, project owners are required to maintain and certify certain information concerning each displaced individual temporarily housed in the project, specifically: name, address of damaged residence, social security number, and a statement signed under penalties of perjury by the displaced individual that, because of damage to the individual’s residence in a Missouri jurisdiction designated for Individual Assistance by FEMA as a result of the severe storms and flooding beginning on June 1, 2008, the individual requires temporary housing. The owner must notify the Commission that vacant units are available for rent to displaced individuals.

The owner must also certify the date the displaced individual began temporary occupancy and the date the project will discontinue providing temporary housing as established by the Commission. The certifications and recordkeeping for displaced individuals must be maintained as part of the annual compliance monitoring process with the Commission.

(4) Rent Restrictions

Rents for the low-income units that house displaced individuals must not exceed the existing rent-restricted rates for the low-income units established under § 42(g)(2).

(5) Protection of Existing Tenants

Existing tenants in occupied low-income units cannot be evicted or have their tenancy terminated as a result of efforts to provide temporary housing for displaced individuals.

This notice is effective June 25, 2008 (the date of the President’s major disaster declarations as a result of the severe storms and flooding in Missouri beginning on June 1, 2008).

The collection of information contained in this notice has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-2108.

An Agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collection of information in this notice is in the section titled “OTHER REQUIREMENTS” under “(3) Certifications and Recordkeeping.” This information is required to enable the Service to verify whether individuals are displaced as a result of the devastation caused by severe storms and flooding in Missouri beginning on June 1, 2008, and thus warrant temporary housing in vacant low-income housing credit units. The collection of information is required to obtain a benefit. The likely respondents are individuals and businesses.

The estimated total annual recordkeeping burden is 125 hours.

The estimated annual burden per recordkeeper is approximately 15 minutes. The estimated number of recordkeepers is 500.

Books or records relating to a collection of information must be retained as long as their contents may become material to the administration of the internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

The principal author of this notice is David Selig of the Office of the Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Mr. Selig at (202) 622-3040 (not a toll-free call).

This revenue procedure describes the conditions under which modifications to certain subprime mortgage loans will not cause the Internal Revenue Service (Service) to challenge the tax status of certain securitization vehicles that hold the loans or to assert that those modifications create a liability for tax on a prohibited transaction.

The purpose of this revenue procedure is to provide certainty in the current economic environment with respect to certain potential tax issues that may be implicated by fast track loan modifications, as described below. No inference should be drawn about whether similar consequences would obtain if a transaction falls outside the limited scope of this revenue procedure. Furthermore, there should be no inference that, in the absence of this revenue procedure, transactions within its scope would have impaired the tax status of securitization vehicles or would have created liability for tax on a prohibited transaction.

Rev. Proc. 2007-72, 2007-52 I.R.B. 1257, provided similar guidance regarding fast-track loan modifications that were effected in a manner consistent with certain principles, recommendations, and guidelines (the “Original Framework”), which the American Securitization Forum (“ASF”) released on December 6, 2007. In July 2008, the ASF released an updated Framework, which covers additional fast-track loan modifications.

This revenue procedure amplifies and supersedes Rev. Proc. 2007-72 by extending its provisions to these additional loan modifications.

.01 On July 8, 2008, the American Securitization Forum (“ASF”) released a document entitled, “Statement of Principles, Recommendations and Guidelines for a Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans” (the “July 2008 Framework”). An Executive Summary of the July 2008 Framework (entitled “Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans”) was released simultaneously and is attached as an Appendix to this revenue procedure.

.02 Both the Original Framework and the July 2008 Framework have been broadly supported as appropriate steps in addressing certain risks in the current economic environment.

.03 The July 2008 Framework applies to first-lien subprime residential adjustable rate mortgage (ARM) loans that—

(1) Have an initial fixed rate period of 36 months or less (including “2/28s” and “3/27s”);

(2) Were originated between January 1, 2005, and July 31, 2007;

(3) Are included in securitized pools; and

(4) Have an initial interest rate reset date between January 1, 2008, and July 31, 2010.

This revenue procedure refers to these instruments as “Loans.”

.04 The July 2008 Framework provides a “fast track” procedure for modifying Loans in advance of an initial, or any subsequent, interest rate reset date and details the criteria for determining which Loans are eligible for the procedure. Modifications pursuant to the procedure are referred to as “fast track modifications.”

.05 A fast track modification affects the interest rate on the Loan, generally for five years following the date on which the rate would have reset in the absence of the modification. During the period affected by the modification, the interest rate on the modified Loan is generally fixed at the rate in effect prior to the upcoming reset date.

.01 Real Estate Mortgage Investment Conduits (REMICs) are widely used securitization vehicles for mortgages. REMICs are governed by sections 860A through 860G of the Internal Revenue Code.

.02 For an organization to qualify as a REMIC, all of the interests in the organization must consist of one or more classes of regular interests and a single class of residual interests, see section 860D(a), and those interests must be issued on the startup day, within the meaning of § 1.860G-2(k) of the Income Tax Regulations.

.03 A regular interest is one that is designated as a regular interest and whose terms are fixed on the startup day. Section 860G(a)(1). In addition, a regular interest must (1) unconditionally entitle the holder to receive a specified principal amount (or other similar amount), and (2) provide that interest payments, if any, at or before maturity are based on a fixed rate (or to the extent provided in regulations, at a variable rate).

.04 An interest issued after the startup day does not qualify as a REMIC regular interest.

.05 Under section 860D(a)(4), an entity qualifies as a REMIC only if, among other things, as of the close of the third month beginning after the startup day and at all times thereafter, substantially all of its assets consist of qualified mortgages and permitted investments. This asset test is satisfied if the entity owns no more than a de minimis amount of other assets. See § 1.860D-1(b)(3)(i). As a safe harbor, the amount of assets other than qualified mortgages and permitted investments is de minimis if the aggregate of the adjusted bases of those assets is less than one percent of the aggregate of the adjusted bases of all of the entity’s assets. § 1.860D-1(b)(3)(ii).

.06 With limited exceptions, a mortgage loan is not a qualified mortgage unless it is transferred to the REMIC on the startup day in exchange for regular or residual interests in the REMIC. See section 860G(a)(3)(A)(i).

.07 The legislative history of the REMIC provisions indicates that Congress intended the provisions to apply only to an entity that holds a substantially fixed pool of real estate mortgages and related assets and that “has no powers to vary the composition of its mortgage assets.” S. Rep. No. 99-313, 99^th Cong., 2^d Sess. 791-92; 1986-3 (Vol. 3) C.B. 791-92.

.08 Section 1.1001-3(c)(1)(i) defines a “modification” of a debt instrument as any alteration, including any deletion or addition, in whole or in part, of a legal right or obligation of the issuer or holder of a debt instrument, whether the alteration is evidenced by an express agreement (oral or written), conduct of the parties, or otherwise. Section 1.1001-3(e) governs which modifications of debt instruments are “significant.” Under § 1.1001-3(b), for most federal income tax purposes, a significant modification produces a deemed exchange of the original debt instrument for a new debt instrument.

.09 Under § 1.860G-2(b), related rules apply to determine REMIC qualification. Except as specifically provided in § 1.860G-2(b)(3), if there is a significant modification of an obligation that is held by a REMIC, then the modified obligation is treated as one that was newly issued in exchange for the unmodified obligation that it replaced. See § 1.860G-2(b)(1). For this purpose, the rules in § 1.1001-3(e) determine whether a modification is “significant.” See § 1.860G-2(b)(2). Thus, even if an entity initially qualifies as a REMIC, one or more significant modifications of loans held by the entity may terminate the qualification if the modifications cause less than substantially all of the entity’s assets to be qualified mortgages.

.10 Certain loan modifications, however, are not significant for purposes of § 1.860G-2(b)(1), even if the modifications are significant under the rules in § 1.1001-3. In particular, under § 1.860G-2(b)(3)(i), if a change in the terms of an obligation is “occasioned by default or a reasonably foreseeable default,” the change is not a significant modification for purposes of § 1.860G-2(b)(1), regardless of the modification’s status under § 1.1001-3.

.11 Section 860F(a)(1) imposes a tax on REMICs equal to 100 percent of the net income derived from “prohibited transactions.” The disposition of a qualified mortgage is a prohibited transaction unless the “disposition [is] pursuant to-(i) the substitution of a qualified replacement mortgage for a qualified mortgage . . . , (ii) a disposition incident to the foreclosure, default, or imminent default of the mortgage, (iii) the bankruptcy or insolvency of the REMIC, or (iv) a qualified liquidation.” Section 860F(a)(2)(A).

.01 Section 301.7701-2(a) of the Procedure and Administration Regulations defines a “business entity” as any entity recognized for federal tax purposes (including an entity with a single owner that may be disregarded as an entity separate from its owner under § 301.7701-3) that is not properly classified as a trust under § 301.7701-4 or otherwise subject to special treatment under the Code.

.02 Section 301.7701-4(a) provides that an arrangement is treated as a trust if the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit.

.03 Section 301.7701-4(c) provides that an “investment” trust is not classified as a trust if there is a power under the trust agreement to vary the investment of the certificate holders.

.01 This revenue procedure applies to the following transactions occurring on or before July 31, 2010—

(1) A fast track modification of a Loan pursuant to the July 2008 Framework; and

(2) A second-lien holder’s action of subordinating its lien to any new lien that may arise under a Loan as the result of such a fast track modification.

.02 If the July 2008 Framework is materially modified after July 8, 2008, this revenue procedure does not necessarily apply to fast track modifications under the modified Framework or to second-lien subordinations to accommodate those modifications.

In the case of one or more transactions to which this revenue procedure applies—

.01 The Service will not challenge a securitization vehicle’s qualification as a REMIC on the grounds that the transactions are not among the exceptions listed in § 1.860G-2(b)(3);

.02 The Service will not contend that the transactions are prohibited transactions under section 860F(a)(2) on the grounds that the transactions resulted in one or more dispositions of qualified mortgages and that the dispositions are not among the exceptions listed in section 860F(a)(2)(A)(i)-(iv);

.03 The Service will not challenge a securitization vehicle’s classification as a trust under § 301.7701-4(c) on the grounds that the transactions manifest a power to vary the investment of the certificate holders; and

.04 The Service will not challenge a securitization vehicle’s qualification as a REMIC on the grounds that the transactions resulted in a deemed reissuance of the REMIC regular interests.

For the treatment of mortgage loans modified pursuant to certain foreclosure prevention programs, see Rev. Proc. 2008-28, 2008-23 I.R.B. 1054.

Rev. Proc. 2007-72 is amplified and, as amplified, is superseded.

This revenue procedure is effective on July 8, 2008.

The principal author of this revenue procedure is Diana Imholtz of the Office of Associate Chief Counsel (Financial Institutions and Products). For further information, contact Ms. Imholtz at (202) 622-3930 (not a toll-free call).

	Appendix to Revenue Procedure 2008-47
	American Securitization Forum Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans
	Executive Summary
	July 8, 2008
Scope:
	This streamlined framework applies to all first lien subprime residential adjustable rate mortgage (ARM) loans that have an initial fixed rate period of 36 months or less (including “2/28s” and “3/27s”), referred to below as “subprime ARM loans” that:
	were originated between January 1, 2005 and July 31, 2007; are included in securitized pools; and have an initial interest rate reset between January 1, 2008 and July 31, 2010.
	This streamlined framework may be applied to subprime ARM loans in advance of an initial, or any subsequent, reset date. Typically, servicer/borrower communication should begin 120 days prior to the initial reset date.
	As a general overview, under this streamlined framework, if the loan is current and is eligible for refinance, then it should be refinanced. If the loan is current but is not eligible for a refinance, then it would be eligible for a streamlined modification if: the property is occupied as the borrower’s primary residence; the borrower meets the “FICO test”; and the payment amount would go up by more than 10% over the current payment amount at the upcoming reset.
Overarching Principles:
	The servicer will not take any action that is prohibited by the pooling and servicing agreement (“PSA”) or other applicable securitization governing document, or that would violate applicable laws, regulations, or accounting standards. ASF’s Statement of Principles, Recommendations and Guidelines for a Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans, published concurrently with this document, analyzes how the framework described in the Executive Summary is consistent with typical PSA provisions. The ASF urges readers of this Executive Summary to review the full Statement. The ASF believes that this framework is consistent with the authority granted to a servicer to modify subprime mortgage loans in typical PSAs. The ASF expects that the procedures in this framework will constitute standard and customary servicing procedures for subprime loans. The servicer will expeditiously implement the ASF Investor Reporting Guidelines for the Modification of Subprime ARM Loans recommended by the ASF, which is simultaneously released with this framework. LTV and CLTV will be determined based on information at origination. If an origination LTV is below 97%, a servicer may obtain an updated home value by obtaining an AVM, BPO or other means. All servicers of second liens to subprime borrowers should cooperate fully with this framework by providing information needed by first lien servicers and by agreeing to subordinate the second lien to any new first lien resulting from a refinance (with no cash out) under this framework. All existing contractual obligations and remedies related to fraudulent mortgage origination activity should be strictly enforced. The streamlined framework outlined in this framework represents the consensus view of the membership of the ASF, acting through its Board of Directors, as to the parameters used to determine the segmentation of subprime ARM loans, including the numeric values included in those parameters. It is understood by the ASF’s members that the numeric values included in the parameters are not based on historic data, but rather simply represent a consensus view as to appropriate numeric values for use within this framework for the purpose of supporting a streamlined approach to loan modifications that complies with typical securitization governing documents. The ASF, acting through its Board of Directors, may in the future change these numeric values or further refine these parameters as experience is gained and market conditions evolve.
Borrower Segmentation:
	Under this framework, subprime ARM loans are divided into 3 segments.
	Segment 1 includes current (as defined below) loans where the borrower is likely to be able to refinance into any available mortgage product, including FHA, FHA Secure or readily available mortgage industry products.
	Generally, the servicer will determine whether loans may be eligible for refinancing into readily available mortgage industry products based on ascertainable data not requiring direct communication with the borrower, such as LTV, loan amount, FICO and payment history. Servicers will generally not determine current income or DTI to determine initial eligibility for refinancing. If the borrower also has a second lien on the property, this framework contemplates that the borrower is able to refinance the first lien only, on a no cash out basis. In order for the loan to fall into this segment, the second lien does not have to be refinanced; however, any second lien holder will need to agree to subordinate their interest to the refinanced first lien.
	Segment 2 includes current loans where the borrower is unlikely to be able to refinance into any readily available mortgage industry product.
	Current: For purposes of this framework “current” means the loan must be not more than 30 days delinquent, and must not have been more than 1 x 60 days delinquent in the last 12 months, both under the OTS method. Corresponding tests would apply under the MBA method if the servicer uses that standard. Not eligible for refinance: All current loans that do not satisfy FHA Secure requirements, including delinquency history, DTI at origination, LTV (97% is the maximum LTV allowed under FHA Secure) and loan amount standards for this program, are within Segment 2; unless the servicer can determine whether they may meet eligibility criteria for another product, by reviewing eligibility criteria without performing an underwriting analysis.
	Segment 3 includes loans where the borrower is not current as defined above, demonstrating difficulty meeting the introductory rate.
Segment 1 — Refinance:
	It is expected that borrowers in this category should refinance their loans, if they are unable or unwilling to meet their reset payment. However, a servicer may evaluate each borrower in this category on a case by case basis or apply any framework consistent with the applicable servicing standard in the transaction documents for a loan modification or other loss mitigation outcome. The servicer will facilitate a refinance in a manner that avoids the imposition of prepayment penalties wherever feasible. This may be accomplished by timing the refinance to occur after the upcoming reset date. Servicers should take all reasonable steps permitted under the PSA and other governing documents to encourage or facilitate refinancing for borrowers in Segment 1, or to borrowers in Segment 2 who become eligible for a refinance, including, where permitted, providing borrowers with information about FHA, FHA Secure and other readily available mortgage industry products, even if that servicer is not able to provide those products through any affiliated originator.
Segment 2 — Loan Modification:
	The servicer will determine the following for each Segment 2 borrower: current owner occupancy status (based on information known to the servicer, including billing and property address), current FICO score and the FICO score at origination of the loan. FICO test: If the current FICO score is less than 660 and is less than a score 10% higher than the FICO score at origination, the borrower is considered to have met the “FICO test.” If the borrower meets the FICO test, the servicer will generally not determine the borrower’s current income. If either a) the current FICO score is 660 or higher, or b) the current FICO is at least 10% higher than the FICO score at origination, the borrower is considered to not meet the “FICO test.” If the borrower does not meet the FICO test, the servicer will use an alternate analysis to determine if the borrower is eligible for a loan modification. Segment 2 loans will only be eligible for a fast track loan modification if: The borrower currently occupies the property as his or her primary residence; The borrower meets the FICO test; and The servicer determines that, at the upcoming reset, the payment amount would go up by more than 10% over the current payment amount. Borrowers in this segment and eligible for a fast track loan modification as described above may be offered a loan modification under which the interest rate will be kept at the existing rate in effect prior to the upcoming reset, generally for 5 years following the upcoming reset. As to Segment 2 loans eligible for a fast track loan modification, the servicer may make the following presumptions: The borrower is able and willing to pay under the loan modification based on his or her current payment history prior to the reset date. The borrower is unable to pay (and default is reasonably foreseeable) after the upcoming reset under the original loan terms, based on the size of the payment increase that would otherwise apply. The modification maximizes the net present value of recoveries to the securitization trust and is in the best interests of investors in the aggregate, because refinancing opportunities are likely not available and the borrower is able and willing to pay under the modified terms. The terms of the loan modification shall be binding on the servicer and the borrower, if there is no signed modification agreement, so long as a) the terms of such loan modification are more favorable to the borrower than the existing terms, and b) the servicer sends a written notice to the borrower describing the terms of the modification. For borrowers that do not meet the FICO test, the servicer will use an alternate analysis to determine if the borrower is eligible for a loan modification, as well as the terms of the modification (which may vary). This may include a) conducting an individual review of current income and debt obligations, debt-to-income analysis, and considering a tailored modification for a borrower, or b) applying any other framework consistent with the applicable servicing standard in the transaction documents to determine if a borrower is eligible for a loan modification. For borrowers that are eligible for a fast track modification, the fast track option is non-exclusive and does not preclude a servicer from using an alternate analysis to determine if a borrower is eligible for a loan modification, as well as the terms of the modification.
Segment 3 — Loss Mitigation:
	For loans in this category, the servicer will determine the appropriate loss mitigation approach in a manner consistent with the applicable servicing standard in the transaction documents, but without employing the fast tracking procedures described under Segment 2. The approach chosen should maximize the net present value of the recoveries to the securitization trust. The available approaches may include loan modification (including rate reduction and/or principal forgiveness), forbearance, short sale, short payoff, or foreclosure. These borrowers will require a more intensive analysis, including where appropriate current debt and income analysis, to determine the appropriate loss mitigation approach.

Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking by cross-reference to temporary regulations.

In this issue of the Bulletin, the IRS and the Treasury Department are issuing temporary regulations (T.D. 9402) under section 956 of the Internal Revenue Code (Code) relating to the determination of basis in property acquired by a controlled foreign corporation in certain nonrecognition transactions that are intended to avoid United States income tax. Those regulations affect United States shareholders of a controlled foreign corporation that acquires United States property in certain nonrecognition transactions. The text of those regulations also serves as the text of these proposed regulations.

Written or electronic comments and requests for a public hearing must be received by September 22, 2008.

Send submissions to: CC:PA:LPD:PR (REG-102122-08), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-102122-08), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically, via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-102122-08).

Concerning the proposed regulations, John H. Seibert, (202) 622-3860; concerning submissions of comments and/or requests for a hearing, Regina Johnson, (202) 622-7180 (not toll-free numbers).

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

The principal author of these regulations is John H. Seibert, Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in their development.

* * * * *

In Revenue Ruling 2008-12, 2008-10 I.R.B. 520, the IRS clarified that a nonmaterially participating partner’s distributive share of the interest expense of a partnership engaged in the trade or business of trading in securities is subject to the investment interest limitation in § 163(d)(1), provided that the partner is an individual. This conclusion is based on the definition of the term “property held for investment” in § 163(d)(5)(A)(ii). Pursuant to that definition, a taxpayer’s interest in a trade or business activity that is not a passive activity is classified as property held for investment for § 163(d) purposes if the taxpayer does not materially participate in such activity. The scope of § 163(d)(5)(A)(ii) is narrow because trade or business activities in which the taxpayer does not materially participate are generally treated as passive activities under the general definition of “passive activity” in § 469(c)(1). However, certain specified trade or business activities are treated as per se nonpassive regardless of the taxpayer’s degree of participation in the activity. For example, § 469(c)(3) provides that the term “passive activity” does not include certain working interests in oil and gas properties. In Revenue Ruling 2008-12, the partnership’s activity involved the trading of personal property (as defined in § 1092(d)) for its own account. Under § 1.469-1T(e)(6), such activity is treated as per se nonpassive. Thus, even though the partnership’s trading activity rose to the level of a trade or business, its interest expense attributable to such activity and allocable to individual partners who did not materially participate in the activity was subject to the § 163(d) limitation, which is applied at the partner level.

Since publication of Revenue Ruling 2008-12, a number of taxpayers have inquired as to whether the interest deduction allowable to the nonmaterially participating limited partner after the application of the § 163(d) limitation would properly be reported on Schedule A, “Itemized Deductions” of Form 1040, “U.S. Individual Income Tax Return” or whether instead the allowable deduction would properly be taken into account in computing the ordinary business income or loss from the trade or business activities of the partnership on Schedule E, “Supplemental Income and Loss.” Revenue Ruling 2008-38, 2008-31 I.R.B. , published concurrently with this announcement, provides that, in the case of an individual taxpayer, interest paid or accrued on indebtedness allocable to property held for investment described in § 163(d)(5)(A)(ii) is a trade or business deduction described in § 62(a)(1) that is deductible (after the application of the § 163(d)(1) limitation) in determining the taxpayer’s adjusted gross income. Accordingly, the limited partner described in Revenue Ruling 2008-12 would properly include the allowable amount of his distributive share of the trading partnership’s interest expense in computing the limited partner’s ordinary business income or loss on Schedule E. Consistent with the reporting requirements of Notice 88-37, 1988-1 C.B. 522, the interest deduction of the limited partner that is properly reportable on Schedule E should be identified on a separate line in Part II, Line 28, column (a), as “investment interest,” followed by the name of the trading partnership that paid or incurred the interest expense, and the amount of such interest expense should be entered in column (h).

The principal author of this announcement is Faith P. Colson of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this announcement, contact Faith P. Colson at (202) 622-3060 (not a toll-free call).