WHFIT & WHMT Tax Relief

IRS provides WHFIT penalty relief for 2008 and WHMT reporting relief for 2007 Notice 2008-77, 2008-40 IRB

In a Notice, IRS has informed trustees and middlemen of widely held fixed investment trusts (WHFITs) that it will not assert penalties under Reg. § 1.671-5(m) (dealing with WHFIT reporting rules) for calendar year 2008. In addition, it informed trustees and middlemen of widely held mortgage trusts (WHMTs) that, pending future published guidance, certain modifications of mortgages held by a WHMT that has entered into a guarantee arrangement aren’t required to be reported under the WHFIT reporting rules.

Background. A WHFIT is an arrangement classified as a trust under Reg. § 301.7701-4(c), provided that: (1) the trust is a U.S. person; (2) the beneficial owners of the trust are treated as owners (under subpart E, part I, subchapter J, chapter 1 of the Code); and (3) at least one interest in the trust is held by a middleman. (Reg. § 1.671-5(b)(22)) A WHMT is a WHFIT, the assets of which consist only of mortgages, regular interests in a real estate mortgage investment company (REMIC), interests in another WHMT, reasonably required reserve funds, amounts received for these assets, and during a brief initial funding period, cash and short-term contracts to purchase these assets. (Reg. § 1.671-5(b)(23))

Reg. § 1.671-5(n) provides that the WHFIT reporting rules are applicable Jan. 1, 2007. T.D. 9308, 12/26/2006, informed trustees and middlemen that IRS wouldn’t impose any penalties that would otherwise apply as a result of a failure to comply with the WHFIT reporting rules for the 2007 calendar year in cases where the trustee or middleman was unable to change its information reporting systems to comply with the WHFIT reporting rules (see Federal Taxes Weekly Alert 01/04/2007).

Penalty relief. Notice 2008-77 informs middlemen and trustees of WHFITs that IRS will not assert penalties as a result of a failure to comply with the WHFIT reporting rules with respect to calendar year 2008. Although WHFIT trustees and middlemen have taken steps to implement the WHFIT reporting rules, IRS has learned that additional time is needed to update the computer and information systems of trustees and middlemen to fully comply with them. Commentators have requested and IRS has granted this relief.

Reporting exception. IRS has also determined that pending the publication of future guidance certain modifications that are made to mortgage loans held by a WHMT don’t have to be reported in cases where a guarantee arrangement compensates the trust or all the trust interest holders for any shortfalls that would otherwise be experienced as a result of the modification. Any future guidance eliminating or modifying this exception will allow trustees and middlemen reasonable time to alter their computer and information reporting systems to comply with the change. IRS requests comments on this reporting exception.

Specifically, Notice 2008-77 excepts from reporting under Reg. § 1.671-5(c)(2)(iv) any modification made to mortgage loans held by a WHMT if all of the following conditions are met:

(1) The WHMT directly holds mortgage loans that are secured by real property; (2) The WHMT modifies a mortgage loan under circumstances that do not cause the trust to be classified other than as a trust as a result of the modification (for example, because the modification doesn’t result in there being a power to vary the investment under Reg. § 301.7701-4(c));

(3) The WHMT has entered into a guarantee arrangement that requires the guarantor to pay to the WHMT any shortfalls in payments from the mortgage loans held by the WHMT (including as a result of a modification) to the extent that mortgage loan payments are insufficient to make required distributions to trust interest holders under the governing documents of the WHMT; and

(4) The modification and the guarantee arrangement, taken together, are such that the stated interest rate and the aggregate amount of the principal payments paid with respect to every trust interest of the WHMT is not altered by the modification.

Effective date. Notice 2008-77 is effective Sept. 12, 2008. Trustees and middlemen may apply the reporting exception provisions as of Jan. 1, 2007.