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 September 2010.

This procedure describes the conditions under which the Service will not challenge a mortgage loan held by a REMIC as other than a ”qualified mortgage” on the grounds that the mortgage loan fails to be principally secured by an interest in real property following the release of a lien on an interest in real property that secures the mortgage loan.

This is a Competent Authority Agreement entered into on July 14, 2010, by the competent authorities of the United States of America and Belgium with respect to the taxation of fellowship payments made to certain researchers under the U.S.-Belgium income tax treaty and protocol.

This procedure provides that if a foreign entity makes a check the box election to be a partnership (under the reasonable assumption that it has more than one owner) but then determines it only had one owner, the original check the box election will be treated as an election to be a disregarded entity provided the requirements in the revenue procedure are satisfied. Similarly, it also provides that if a foreign entity makes a check the box election to be disregarded entity (under the reasonable assumption that it has only one owner) but then determines it only had more than one owner, the original check the box election will be treated as an election to be a partnership provided the requirements in the revenue procedure are satisfied.

This revenue ruling provides various prescribed rates for federal income tax purposes for September 2010 (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)(1) for buildings placed in service during the current month. However, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, and before December 31, 2013, shall not be less than 9%. 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.

The following is a copy of the Competent Authority Agreement entered into on July 14, 2010, by the competent authorities of the United States of America and Belgium with respect to the taxation of fellowship payments made to certain researchers under the U.S.-Belgium income tax treaty and protocol.

The text of the Competent Authority Agreement is as follows:

This revenue procedure describes the circumstances under which the Internal Revenue Service (the “Service”) will not challenge a mortgage loan held by a real estate mortgage investment conduit (a “REMIC”) as other than a “qualified mortgage” on the grounds that the mortgage loan fails to be principally secured by an interest in real property for purposes of section 860G(a)(3)(A) of the Internal Revenue Code and § 1.860G-2(a)(8) of the Income Tax Regulations following a release of a lien on an interest in real property that secures the mortgage loan.

.01 Frequently, a single commercial mortgage loan is secured by liens on multiple interests in real property.

.02 The terms of a commercial mortgage loan typically allow the borrower to obtain a release of a lien if certain conditions are satisfied. In a limited number of cases, the borrower may obtain the release of a lien at will. More often, a lien release is conditioned on a requirement that the borrower pay down the principal on the loan by a prescribed amount. If the mortgage loan is secured by multiple properties, the terms of the obligation may provide that certain properties may be sold and the sale proceeds applied to pay down the loan. In general, the payment required must be no less than the net proceeds from a sale of the property or no less than an amount that is calculated by a predetermined formula.

.03 In addition, the terms of the obligation may provide that, in the event of a casualty loss or a condemnation of all or a portion of the property, the borrower may obtain the release of the affected property if it applies the insurance proceeds or the condemnation award to pay down the loan.

.01 Commercial mortgage loans are commonly pooled and held in REMICs, securitization vehicles governed by sections 860A through 860G.

.02 Section 860D(a)(4) provides, in pertinent part, that an entity qualifies as a REMIC only if, as of the close of the third month beginning after the startup day and at all times thereafter, substantially all of the entity’s 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. Section 1.860D-1(b)(3)(ii).

.03 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).

.04 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.

.05 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.

.06 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 entity’s qualification if the modifications cause less than substantially all of the entity’s assets to be qualified mortgages.

.07 Certain loan modifications are not significant modifications for purposes of § 1.860G-2(b)(1), even if the modifications are significant under § 1.1001-3. Section 1.860G-2(b)(3) contains a list of modifications that are expressly permitted without regard to the section 1001 modification rules.

.01 A mortgage loan is a qualified mortgage only if it is principally secured by an interest in real property. Section 860G(a)(3)(A).

.02 In general, for purposes of section 860G(a)(3)(A), an obligation is principally secured by an interest in real property only if it satisfies the “80-percent test” set forth in § 1.860G-2(a)(i). (Section 1.860G-2(a)(ii) contains an alternative test.)

.03 Under the 80-percent test, an obligation is principally secured by an interest in real property if the fair market value of the interest in real property securing the obligation—

.04 In the absence of a lien release or certain other transactions that alter a legal right or obligation either of a REMIC or of the issuer of a mortgage loan that is held by the REMIC, the mortgage loan is not retested to determine whether the current value of its real estate collateral still satisfies the principally secured test.

.05 Under § 1.860G-2(a)(8), if a REMIC releases its lien on an interest in real property that secures a qualified mortgage, the mortgage ceases to be a qualified mortgage on the date the lien is released unless either—

(i) The modification either is not a significant modification as defined in § 1.860G-2(b)(2) or, under one of the exceptions in § 1.860G-2(b)(3), is not treated as a significant modification for purposes of § 1.860G-2(b)(1); and

(ii) Following the modification, the obligation continues to be principally secured by an interest in real property, as determined by § 1.860G-2(b)(7).

.06 Section 1.860G-2(b)(7) provides that, for purposes of §§ 1.860G-2(a)(8)(i), 1.860G-2(b)(3)(v), and 1.860G-2(b)(3)(vi), an obligation continues to be principally secured by an interest in real property following a transaction that alters the legal rights of the parties only if, as of the date of the transaction, the obligation satisfies either paragraph (b)(7)(ii) or paragraph (b)(7)(iii) of § 1.860G-2.

.07 An obligation satisfies § 1.860G-2(b)(7)(ii) if the fair market value of the interest in real property securing the obligation, determined as of the date of the modification, is at least 80 percent of the adjusted issue price of the modified obligation, determined as of the date of the modification. If, as of the date of the modification, the servicer reasonably believes that the obligation satisfies the criterion in the preceding sentence, then the obligation is deemed to do so. A reasonable belief does not exist if the servicer actually knows, or has reason to know, that the criterion is not satisfied. For purposes of § 1.860G-2(b)(7)(ii), a servicer must base a reasonable belief on—

.08 An obligation satisfies § 1.860G-2(b)(7)(iii) if § 1.860G-2(b)(7)(ii) is not satisfied but the fair market value of the interest in real property that secures the obligation immediately after the modification equals or exceeds the fair market value of the interest in real property that secured the obligation immediately before the modification. The criterion in the preceding sentence must be established by a current appraisal, an original (and updated) appraisal, or some other commercially reasonable valuation method; and the servicer must not actually know, or have reason to know, that the criterion in the preceding sentence is not satisfied.

.09 Under § 1.860G-2(a)(5), obligations secured by interests in real property include mortgage pass-through certificates guaranteed by GNMA, FNMA, FHLMC, or CMHC (Canada Mortgage and Housing Corporation) and other investment trust interests that represent undivided beneficial ownership in a pool of obligations principally secured by interests in real property and related assets that would be considered to be permitted investments if the investment trust were a REMIC, provided that the investment trust is classified as a trust under § 301.7701-4(c) of the Procedure and Administration Regulations.

.10 Under § 1.860G-2(b)(6), if a REMIC holds as a qualified mortgage a pass-through certificate or other investment trust interest of the type described in § 1.860G-2(a)(5), the modification of a mortgage loan that backs the pass-through certificate or other interest is not a modification of the pass-through certificate or other interest unless the investment trust structure was created to avoid the prohibited transaction rules of section 860F(a). Analogously, unless a substantial purpose of the trust structure was to avoid the restrictions imposed by § 1.860G-2(a)(8) and § 1.860G-2(b), the release of a lien on an interest in real property that secures an obligation held by the trust does not cause § 1.860G-2(a)(8) automatically to disqualify the obligation.

.11 When there are significant declines in commercial real estate property values, properties that secure commercial loans may fall in value to an amount below the 80 percent threshold. The borrower may be in default on its obligation or default may be reasonably foreseeable. In these instances, the servicer may work with the borrower to avoid default.

.12 In the preamble to final regulations published September 16, 2009 (the “Final Regulations”), the Service noted that, although a qualified mortgage must be principally secured by an interest in real property, a release pursuant to the terms of a mortgage obligation is not a release that disqualifies the mortgage if the mortgage continues to be principally secured by real property after giving effect to any releases, substitutions, additions, or other alterations to the collateral. In addition, the preamble explains that a lien release occasioned by a default or reasonably foreseeable default would not disqualify a mortgage if the principally secured test continues to be satisfied. See T.D. 9463, 74 FR 47436-01.

.01 This revenue procedure applies to a release of a lien on an interest in real property that secures a mortgage loan held by a REMIC in circumstances in which §§ 1.860G-2(b)(7)(ii) and 1.860G-2(b)(7)(iii) are not satisfied. A release of a lien that is effected by either a grandfathered transaction described in section 5.02 of this revenue procedure or by a qualified pay-down transaction described in section 5.03 of this revenue procedure qualifies for the benefits of this revenue procedure.

.02 A grandfathered transaction is any release of a lien on an interest in real property that satisfies the following two criteria—

.03 A “qualified pay-down transaction” is a transaction in which a lien is released on an interest in real property and which includes a payment by the borrower resulting in a reduction in the adjusted issue price of the loan by a “qualified amount” as described in section 5.04 of this revenue procedure.

.04 A “qualified amount” is an amount that is equal to or greater than at least one of the following:

.05 The term “net proceeds” for purposes of section 5.04(1) of this revenue procedure means the amount realized for purposes of computing gain or loss under section 1001.

.06 If, as of the date of the lien release, the servicer reasonably believes that the transaction satisfies one of the criteria set forth in section 5.04(3) or 5.04(4) of this revenue procedure, then that criterion is deemed to be satisfied. A reasonable belief does not exist, however, if the servicer actually knows, or has reason to know, that the criterion is not satisfied. For purposes of this section 5.06, a reasonable belief must be based on the information or methods described in § 1.860G-2(b)(7)(ii)(A)-(D).

If a release of a lien on an interest in real property that secures a mortgage loan held by a REMIC satisfies the requirements of section 5 of this revenue procedure, the Service will not challenge the mortgage loan’s status as a qualified mortgage on the grounds that the loan fails to be principally secured by an interest in real property for purposes of section 860G(a)(3)(A) and § 1.860G-2(a)(8)(i)(B) following the release of the lien.

The following examples illustrate the application of this revenue procedure:

.01 Example 1

(1) Facts.

(i) On a date subsequent to December 6, 2010, Borrower B issued a mortgage loan to lender L. At origination, the stated principal of B’s loan was $100 million, and nine interests in real property (X₁ through X₉ ) secured the loan. L contributed the loan to R, a REMIC.

(ii) At the time when the loan was originated and the liens were created, the fair market values of these properties were as shown in the center column below:

(iii) Under the loan documents, in the event that some of the real collateral suffers a casualty loss, B may demand a release of the lien(s) on the affected collateral but may do so only if B pays down the loan with the proceeds of a sale of that collateral and the proceeds of any insurance settlement with respect to the casualty loss.

(iv) On Date 1, R released the lien on X₁ in a transaction that did not cause the mortgage loan issued by B to cease to be a qualified mortgage.

(v) Subsequent to Date 1, on Date 2, properties X₂ and X₃ sustained a casualty loss. Immediately prior to the casualty, properties X₂ and X₃ had an aggregate fair market value of $19.5 million. On Date 2, after the casualty, they had a fair market value of $14.5 million.

(vi) Consistent with B’s rights under the loan documents, B demanded a release of the liens on properties X₂ and X₃ to enable B to sell them. At the time the liens on these two properties were released, the values of the various properties securing the loan were as shown in the right-hand column in the table above. B disposed of properties X₂ and X₃ in an arms-length sale to an unrelated person. The net proceeds from the sale within the meaning of section 5.05 of this revenue procedure were $14 million, and B paid down the loan by that amount when B received those proceeds. Subsequently, B received $5 million as an insurance settlement with respect to the loss suffered by the two properties, and B paid down the loan by an additional $5 million when those proceeds were received.

(2) Analysis.

(i) Under § 1.860G-2(a)(8), R’s release of the liens on properties X₂ and X₃ causes the loan to cease to be a qualified mortgage unless the release takes place in a transaction that satisfies either paragraph (a)(8)(i) or paragraph (a)(8)(ii) of § 1.860G-2. The release of the liens on X₂ and X₃ does not satisfy § 1.860G-2(a)(8)(ii) because the release is not pursuant to a defeasance. The lien release, however, satisfies § 1.860G-2(a)(8)(i) if the transaction in which it occurs meets the requirements of § 1.860G-2(a)(8)(i)(A) and § 1.860G-2(a)(8)(i)(B).

(ii) The transaction in which the lien was released resulted from the exercise of an option that is unilateral within the meaning of § 1.1001-3(c)(3). Thus, the transaction is not a significant modification as defined in § 1.860G-2(b)(2) and therefore is described in § 1.860G-2(a)(8)(i)(A). In addition, however, to satisfy § 1.860G-2(a)(8)(i)(B), the loan must continue to be principally secured by an interest in real property as determined by § 1.860G-2(b)(7).

(iii) The release of the lien on X₂ and X₃ does not satisfy the 80-percent test in § 1.860G-2(b)(7)(ii) or the alternative test in § 1.860G-2(b)(7)(iii). The loan, however, continues to be treated as principally secured by an interest in real property if this release and the associated paydown of the loan are within the scope of section 5 of this revenue procedure.

(iv) The release of the liens on properties X₂ and X₃ is not part of a grandfathered transaction described in section 5.02 of this revenue procedure because B issued the loan after December 6, 2010.

(v) The release of the liens on properties X₂ and X₃ , however, is within the scope of section 5.03 of this revenue procedure if it is part of a “qualified paydown transaction.” First, the transaction involved a release of a lien on an interest in real property and included a payment by the borrower that resulted in a reduction in the adjusted issue price of the loan. Second, the transaction meets the requirements of both section 5.03(4) and section 5.03(1) of this revenue procedure. Third, the payment by the borrower to reduce the adjusted issue price of the loan is a “qualified amount” as described in section 5.04(1) of this revenue procedure. The qualified amount is $19 million, which is the amount realized for purposes of computing gain or loss under section 1001 of the Code. Thus, the transaction satisfies the requirements of section 5.03 of this revenue procedure. Therefore, under Section 6 of this revenue procedure, the Service will not challenge the mortgage loan’s status as a qualified mortgage on the grounds that, following the release of the liens, it fails to be principally secured by an interest in real property for purposes of section 860G(a)(3)(A) and § 1.860G-2(a)(8)(i)(B).

.02 Example 2

(1) Facts.

(i) Assume the same facts as in (i) and (iv) of Example 1. Assume further that the executed loan documents give B a unilateral right to obtain a release of any one or more of the properties that secure the loan, but only if B pays down 110 percent of the “allocated loan amount” for the property or properties the liens on which are being released. The loan documents define “allocated loan amount” as the proportionate loan balance of the properties on which liens are released, based on the relative appraised values of the properties at origination of the loan.

(ii) At the time when the loan was originated and the liens were created, the fair market values of the nine properties securing the loan were as shown in the center column below. The appraised values at that time were the same.

(iii) At a time when the fair market values of X₂ through X₉ had declined by 35%, B exercised its right to obtain a release of the liens on X₂ and X₃ . Immediately before R released the liens, the loan’s adjusted issue price (within the meaning of § 1.1275-1(b)) for federal income tax purposes was $79 million (as a result of amortization and prepayments on the loan). The unpaid loan balance for purposes of computing the allocated loan amount under the loan agreement was $80 million. To obtain the lien release, B paid $29,333,333 to reduce the unpaid principal on the loan. This amount was determined as—

(iv) Immediately before and after the lien release and paydown, the values of properties X₂ through X₉ were as shown in the right-hand column in the table above. Thus, the aggregate fair market value ($39 million) of the interests in real property that secured the loan immediately after the release of the lien was less than 80 percent of the loan’s adjusted issue price ($49,666,667). ($49,666,667 = $79,000,000 - $29,333,333). ([39,000,000 / 49,666,667] = 78.5 percent).

(2) Analysis.

(i) Under § 1.860G-2(a)(8), R’s release of the liens on properties X₂ and X₃ causes the loan to cease to be a qualified mortgage unless the release takes place in a transaction that satisfies either paragraph (a)(8)(i) or paragraph (a)(8)(ii) of § 1.860G-2. The release of the liens on X₂ and X₃ does not satisfy § 1.860G-2(a)(8)(ii) because it is not pursuant to a defeasance. The release of the liens on X₂ and X₃ , however, satisfies § 1.860G-2(a)(8)(i) if the transaction in which the liens are released meets the requirements of § 1.860G-2(a)(8)(i)(A) and § 1.860G-(a)(8)(i)(B).

(ii) The transaction in which the liens were released resulted from the exercise of an option that is unilateral within the meaning of § 1.1001-3(c)(3). Thus, the transaction is not a significant modification as defined in § 1.860G-2(b)(2) and therefore is described in § 1.860G-2(a)(8)(i)(A). In addition, however, to satisfy § 1.860G-2(a)(8)(i)(B), the loan must continue to be principally secured by an interest in real property as determined by § 1.860G-2(b)(7).

(iii) The release of the liens on X₂ and X₃ does not satisfy the 80-percent test in § 1.860G-2(b)(7)(ii) or the alternative test in § 1.860G-2(b)(7)(iii). The loan, however, continues to be treated as principally secured by an interest in real property if the release and the associated paydown of the loan are within the scope of section 5 of this revenue procedure.

(iv) The release of the liens on properties X₂ and X₃ is not part of a grandfathered transaction described in section 5.02 of this revenue procedure because B issued the loan on a date after December 6, 2010.

(v) The release of the liens on properties X₂ and X₃ , however, satisfies section 5.03 of this revenue procedure if it is part of a “qualified paydown transaction.” First, the transaction involves a release of a lien on an interest in real property and contains a payment by the borrower that results in a reduction in the adjusted issue price of the loan. Second, because the transaction is pursuant to the terms of the loan document and is not a modification for purposes of § 1.1001-3, the condition in section 5.03(1) of this revenue procedure is satisfied. Third, the payment by the borrower to reduce the adjusted issue price of the loan is a “qualified amount” because it is not less than the amount described in section 5.04(2) of this revenue procedure. The $29,333,333 amount by which the loan was paid down (the contractually determined allocated loan amount) is greater than the minimum amount of $26,333,333, which is required by section 5.04(2). ($26,333,333 = [79,000,000 × (30,000,000 / 90,000,000)]). (The value of X₁ at origination is not included in the denominator because X₁ did not secure the loan immediately before the lien release.) Thus, the transaction is a qualified paydown transaction within the meaning of section 5.03 of this revenue procedure, and, therefore, under section 6 of this revenue procedure, the Service will not challenge the mortgage loan’s status as a qualified mortgage on the grounds that, following the release of the liens, it fails to continue to be principally secured by an interest in real property for purposes of section 860G(a)(3)(A) and § 1.860G-2(a)(8)(i)(B).

.03 Example 3

(1) Facts.

(i) Assume that the facts are the same as (i) of Example 2, except that at origination there was also a tenth property (X₁₀ ) securing the loan. Property X₁₀ was an “outparcel,” which had not been appraised at the time of origination of the loan and to which L had not assigned any value in underwriting the loan. The loan documents at origination granted B an unconditional right to demand a release of the lien on X₁₀ at any time, without making any special payment on the loan. Although the value of property X₁₀ was small compared to properties X₁ through X₉ , it was positive at all times relevant to this example. Moreover, at the time of the lien release described below, the servicer of the loan knew or had reason to know that the fair market value of X₁₀ had been positive at origination.

(ii) At the time when the loan was originated and the liens were created, the fair market values of the ten properties securing the loan were as shown in the center column below. Except for property X₁₀ >, the appraised values at that time were the same. Immediately before and after the lien release, the fair market values of properties X₂ > through X₁₀ > were as shown in the right-hand column below. (Except for property X₁₀ >, the information in this table is the same as that in Facts (ii) of Example 2.)

(iii) After Date 1 _, B exercised its right to demand a release of the lien on property X₁₀ (the outparcel). B did not make any payment on the loan in connection with the lien release.

(2) Analysis.

(i) Under § 1.860G-2(a)(8), R’s release of the lien on property X₁₀ causes the loan to cease to be a qualified mortgage unless the release takes place in a transaction that satisfies either paragraph (a)(8)(i) or paragraph (a)(8)(ii) of § 1.860G-2. The lien release on property X₁₀ does not satisfy § 1.860G-2(a)(8)(ii) because it is not pursuant to a defeasance. The lien release on property X₁₀ satisfies § 1.860G-2(a)(8)(i) only if the transaction in which it occurs meets the requirements of both § 1.860G-2(a)(8)(i)(A) and § 1.860G-2(a)(8)(i)(B).

(ii) The transaction in which the lien was released resulted from the exercise of an option that is unilateral within the meaning of § 1.1001-3(c)(3). Thus, the transaction is not a significant modification as defined in § 1.860G-2(b)(2) and therefore is described in § 1.860G-2(a)(8)(i)(A). In addition, however, to satisfy § 1.860G-2(a)(8)(i)(B), the loan must continue to be principally secured by an interest in real property as determined by § 1.860G-2(b)(7).

(iii) The release of the lien on X₁₀ does not satisfy the 80-percent test in § 1.860G-2(b)(7)(ii) or the alternative test in § 1.860G-2(b)(7)(iii).

(iv) The unilateral right to release the lien on property X₁₀ without paying down the loan is not a grandfathered transaction described in section 5.02 of this revenue procedure because B issued the loan after December 6, 2010.

(v) The release of the lien on property X₁₀ is within the scope of section 5.03 of this revenue procedure only if it is pursuant to a “qualified paydown transaction.” Under the loan documents, the allocated loan amount of property X₁₀ may be zero, but that amount does not satisfy section 5.04(2) of this revenue procedure. Although property X₁₀ was assigned no value for underwriting purposes, the servicer knew or had reason to know that, at origination, it had a value greater than $0. Therefore, the amount required by section 5.04(2) of this revenue procedure is greater than zero.

(vi) Because the transaction does not meet the requirements either of section 5 of this revenue procedure or of § 1.860G-2(b)(7)(ii)-(iii), § 1.860G-2(a)(8)(i)(B) is not satisfied, and § 1.860G-(a)(8) causes the loan to cease being a qualified mortgage on the date that the lien is released.

This revenue procedure applies to releases of liens on interests in real property securing mortgage loans held by REMICs that are effected on or after September 16, 2009.

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

The Treasury Department and the Internal Revenue Service (IRS) have become aware that taxpayers are concerned about the validity of elections made by certain foreign eligible entities under § 301.7701-3(c) of the Procedure and Administration Regulations to be classified for federal tax purposes as a partnership or disregarded as an entity separate from its owner (a disregarded entity). The Treasury Department and IRS understand that these concerns arise due to uncertainty regarding the number of owners for federal tax purposes of the foreign eligible entity on the effective date of the election. To alleviate these concerns and simplify tax administration, this revenue procedure provides that, if the requirements of this revenue procedure are satisfied, the IRS will treat an election under § 301.7701-3(c) to classify a foreign eligible entity that is a qualified entity (as defined in section 3.02 of this revenue procedure) as a partnership or disregarded entity as an election to be treated as a partnership or disregarded entity (as appropriate) rather than as an association taxable as a corporation.

.01 Section 301.7701-1(a)(1) states that the Internal Revenue Code (Code) prescribes the classification of various organizations for federal tax purposes. Whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law.

.02 Section 301.7701-1(b) provides that the classification of organizations that are recognized as separate entities is determined under §§ 301.7701-2, 301.7701-3, and 301.7701-4 unless a provision of the Code provides for special treatment of that organization.

.03 Section 301.7701-2(a) defines the term “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 (“a disregarded entity”)) that is not properly classified as a trust under § 301.7701-4 or otherwise subject to special treatment under the Code. A business entity with two or more members is classified for federal tax purposes as either a corporation or a partnership. A business entity with only one owner is classified as a corporation or is disregarded; if the entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner.

.04 Section 301.7701-3(a) provides that a business entity that is not classified as a corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) (an eligible entity) can elect its classification for federal tax purposes. An eligible entity with at least two members can elect to be classified as either an association (and thus a corporation under § 301.7701-2(b)(2)) or a partnership, and an eligible entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner. Elections are necessary only if an eligible entity does not want its default classification or if an eligible entity chooses to change its classification.

.05 Section 301.7701-3(b)(2)(i) provides that, except for certain existing entities described in § 301.7701-3(b)(3), unless a foreign eligible entity elects otherwise, the entity is: (A) a partnership if it has two or more members and at least one member does not have limited liability; (B) an association if all members have limited liability; or (C) disregarded as an entity separate from its owner if it has a single member that does not have limited liability.

.06 Section 301.7701-3(c)(1)(i) provides that an eligible entity may elect to be classified other than as provided under § 301.7701-3(b) by filing Form 8832, Entity Classification Election, with the appropriate IRS Service Center. Under § 301.7701-3(c)(1)(iii), this election will be effective on the date specified by the entity on Form 8832 or on the date filed if no such date is specified on the election form. The effective date specified on Form 8832 cannot be more than 75 days prior to the date on which the election is filed and cannot be more than 12 months after the date on which the election is filed.

.07 Section 301.7701-3(c)(1)(ii) provides that an eligible entity required to file a federal tax or information return for the taxable year for which an election is made must attach a copy of its Form 8832 to its federal tax or information return for that year. If the entity is not required to file a return for that year, a copy of its Form 8832 must be attached to the federal income tax or information return of any direct or indirect owner of the entity for the taxable year of the owner that includes the date on which the election was effective.

.08 Section 301.7701-3(c)(1)(iv) provides in part that, if an eligible entity makes an election under paragraph (c)(1)(i) of this section to change its classification (other than an election made by an existing entity to change its classification as of the effective date of this section), the entity cannot change its classification by election again during the 60 months succeeding the effective date of the election. An election by a newly formed eligible entity that is effective on the date of formation is not considered a change for purposes of this paragraph (c)(1)(iv).

.09 Section 301.7701-3(c)(2)(i) provides that an election made under §301.7701-3(c)(1)(i) of this section must be signed by: (A) each member of the electing entity who is an owner at the time the election is filed; or (B) any officer, manager, or member of the electing entity who is authorized (under local law or the entity’s organizational documents) to make the election and who represents to having such authorization under penalties of perjury.

.01 In General. This revenue procedure provides guidance on the classification for federal tax purposes of a business entity that is a qualified entity (as defined in section 3.02 of this revenue procedure) and is in lieu of the letter ruling process ordinarily used to obtain relief for a late change of entity classification election filed pursuant to §§ 301.7701-3(c), 301.9100-1, and 301.9100-3. Accordingly, user fees do not apply to corrective actions under this revenue procedure.

.02 Qualified Entity. For purpose of this revenue procedure, a business entity is a “qualified entity” if the following conditions are satisfied:

.03 Entities That Fail to Qualify for Relief Under This Revenue Procedure.

A business entity that does not qualify for relief under this revenue procedure may request relief through the letter ruling process in accordance with Rev. Proc. 2010-1, 2010-1 I.R.B. 1 (or its successor).

.01 If a qualified entity files an otherwise valid Form 8832 to be classified as a partnership for federal tax purposes but it is later determined that the qualified entity had a single owner for federal tax purposes as of the effective date of the election, the IRS will treat the Form 8832 as an election to classify the qualified entity as a disregarded entity for federal tax purposes provided that:

.02 If a qualified entity files an otherwise valid Form 8832 electing to be classified as a disregarded entity for federal tax purposes but it is later determined that the qualified entity had two or more owners for federal tax purposes as of the effective date of the election, the IRS will treat the Form 8832 as an election to classify the qualified entity as a partnership for federal tax purposes provided that:

This revenue procedure is effective on September 7, 2010. Any qualified entity that meets the requirements of this revenue procedure as of September 7, 2010, may seek relief under this revenue procedure.

The principal author of this revenue procedure is Bryan A. Rimmke of the Office of the Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue procedure, contact Mr. Rimmke at (202) 622-3050 (not a toll-free call).

The Office of Professional Responsibility (OPR) announces recent disciplinary sanctions involving attorneys, certified public accountants, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and appraisers. These individuals are subject to the regulations governing practice before the Internal Revenue Service (IRS), which are set out in Title 31, Code of Federal Regulations, Part 10, and which are published in pamphlet form as Treasury Department Circular No. 230. The regulations prescribe the duties and restrictions relating to such practice and prescribe the disciplinary sanctions for violating the regulations.

The disciplinary sanctions to be imposed for violation of the regulations are:

Disbarred from practice before the IRS—An individual who is disbarred is not eligible to represent taxpayers before the IRS.

Suspended from practice before the IRS—An individual who is suspended is not eligible to represent taxpayers before the IRS during the term of the suspension.

Censured in practice before the IRS—Censure is a public reprimand. Unlike disbarment or suspension, censure does not affect an individual’s eligibility to represent taxpayers before the IRS, but OPR may subject the individual’s future representations to conditions designed to promote high standards of conduct.

Monetary penalty—A monetary penalty may be imposed on an individual who engages in conduct subject to sanction or on an employer, firm, or entity if the individual was acting on its behalf and if it knew, or reasonably should have known, of the individual’s conduct.

Disqualification of appraiser—An appraiser who is disqualified is barred from presenting evidence or testimony in any administrative proceeding before the Department of the Treasury or the IRS.

Under the regulations, attorneys, certified public accountants, enrolled agents, enrolled actuaries, and enrolled retirement plan agents may not assist, or accept assistance from, individuals who are suspended or disbarred with respect to matters constituting practice (i.e., representation) before the IRS, and they may not aid or abet suspended or disbarred individuals to practice before the IRS.

Disciplinary sanctions are described in these terms:

Disbarred by decision after hearing, Suspended by decision after hearing, Censured by decision after hearing, Monetary penalty imposed after hearing, and Disqualified after hearing—An administrative law judge (ALJ) conducted an evidentiary hearing upon OPR’s complaint alleging violation of the regulations and issued a decision imposing one of these sanctions. After 30 days from the issuance of the decision, in the absence of an appeal, the ALJ’s decision became the final agency decision.

Disbarred by default decision, Suspended by default decision, Censured by default decision, Monetary penalty imposed by default decision, and Disqualified by default decision—An ALJ, after finding that no answer to OPR’s complaint had been filed, granted OPR’s motion for a default judgment and issued a decision imposing one of these sanctions.

Disbarment by decision on appeal, Suspended by decision on appeal, Censured by decision on appeal, Monetary penalty imposed by decision on appeal, and Disqualified by decision on appeal—The decision of the ALJ was appealed to the agency appeal authority, acting as the delegate of the Secretary of the Treasury, and the appeal authority issued a decision imposing one of these sanctions.

Disbarred by consent, Suspended by consent, Censured by consent, Monetary penalty imposed by consent, and Disqualified by consent—In lieu of a disciplinary proceeding being instituted or continued, an individual offered a consent to one of these sanctions and OPR accepted the offer. Typically, an offer of consent will provide for: suspension for an indefinite term; conditions that the individual must observe during the suspension; and the individual’s opportunity, after a stated number of months, to file with OPR a petition for reinstatement affirming compliance with the terms of the consent and affirming current eligibility to practice (i.e., an active professional license or active enrollment status). An enrolled agent or an enrolled retirement plan agent may also offer to resign in order to avoid a disciplinary proceeding.

Suspended by decision in expedited proceeding, Suspended by default decision in expedited proceeding, Suspended by consent in expedited proceeding—OPR instituted an expedited proceeding for suspension (based on certain limited grounds, including loss of a professional license and criminal convictions).

OPR has authority to disclose the grounds for disciplinary sanctions in these situations: (1) an ALJ or the Secretary’s delegate on appeal has issued a decision on or after September 26, 2007, which was the effective date of amendments to the regulations that permit making such decisions publicly available; (2) the individual has settled a disciplinary case by signing OPR’s “consent to sanction” form, which requires consenting individuals to admit to one or more violations of the regulations and to consent to the disclosure of the individual’s own return information related to the admitted violations (for example, failure to file Federal income tax returns); or (3) OPR has issued a decision in an expedited proceeding for suspension.

Announcements of disciplinary sanctions appear in the Internal Revenue Bulletin at the earliest practicable date. The sanctions announced below are alphabetized first by the names of states and second by the last names of individuals. Unless otherwise indicated, section numbers (e.g., § 10.51) refer to the regulations.