[Federal Register Volume 61, Number 243 (Tuesday, December 17, 1996)]
[Rules and Regulations]
[Pages 66212-66215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31772]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8692]
RIN 1545-AR57
Reissuance of Mortgage Credit Certificates
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final regulations relating to the
reissuance of mortgage credit certificates. Changes to the applicable
law were made by the Tax Reform Act of 1984. The regulations provide
guidance to issuers and holders of mortgage credit certificates.
EFFECTIVE DATE: These regulations are effective December 17, 1996.
FOR FURTHER INFORMATION CONTACT: L. Michael Wachtel, (202) 622-3980
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document adds final regulations to the Income Tax Regulations
(26 CFR part 1) to provide guidance under section 25(e)(4) of the
Internal Revenue Code (Code) with respect to the reissuance of mortgage
credit certificates. Section 25(e)(4) was added to the Code by section
612 of the Tax Reform Act of 1984, 98 Stat. 494, 905.
On December 22, 1993, temporary regulations (TD 8502) relating to
refinancing under section 25(e)(4) were published in the Federal
Register (58 FR 67689). A notice of proposed rulemaking (REG-209574-92,
previously FI-47-92) cross-referencing the temporary regulations was
published in the Federal Register for the same day (58 FR 67744).
Written comments responding to these notices were received. There
were no requests to appear in response to publication of a notice of a
hearing in the Federal Register (61 FR 15204). Therefore, no public
hearing was held. After consideration of all the comments, the proposed
regulations under section 25(e)(4) are adopted as revised by this
Treasury decision, and the corresponding temporary regulations are
removed. The comments and revisions are discussed below.
Explanation of Provisions and Summary of Comments
The temporary regulations permit the reissuance of a mortgage
credit
[[Page 66213]]
certificate on or after December 22, 1992, but no later than 1 year
after the date of the refinancing. Commentators thought this
unnecessarily limited eligibility for the reissuance of a certificate
and limited the flexibility of State and local governments. The final
regulations, reflecting the goal of giving State and local governments
maximum flexibility to administer mortgage credit certificate programs,
remove these limits. A State or local government may reissue a
certificate to any person who refinanced a mortgage for which a
mortgage credit certificate was issued and who meets the other
requirements for a reissued certificate. The credit for prior years is
available to the extent that the certificate holder may file a claim
for refund.
The temporary regulations provide that the certified mortgage
indebtedness amount on the reissued certificate cannot exceed the
remaining balance of the certified mortgage indebtedness amount on the
existing certificate. Commentators suggested that the final regulations
permit the indebtedness amount on the reissued certificate to include
costs such as closing costs of the refinancing loan. This
recommendation was not implemented in the final regulations because
section 25(e)(4) of the Code limits the amount of the reissued
certificate to the outstanding balance of the existing certificate.
The temporary regulations provide that the reissued certificate may
not result in an increase in the credit that would otherwise have been
allowable to the holder under the existing certificate for any taxable
year. In the case of a series of refinancings, the amount allowable on
the refinanced loan would be the amount allowable on the original loan,
rather than the immediately preceding refinanced loan.
A holder of a mortgage credit certificate who refinances a fixed
rate loan can determine the amount of interest that would have been
paid for any taxable year on the refinanced loan from an amortization
schedule that projects interest and principal payments over the life of
the loan. By applying the mortgage credit rate to the amount of
interest, the holder can calculate the amount of tax credit that would
have been allowable for the taxable year.
The amount of tax credit that would have been allowable for a
taxable year is not as easily calculated by a holder of a mortgage
credit certificate who refinances a variable rate loan because the
holder cannot project an amortization schedule for the refinanced loan.
Instead, each year the holder must calculate the amount of interest
that would have been paid on the refinanced loan under the interest
rate in effect for that year and then calculate the tax credit that
would have been allowable. This procedure was described as burdensome
by various commentators.
The final regulations continue to reflect the statutory requirement
that the reissued certificate not result in an increase in the credit
that would otherwise have been allowable to the certificate holder
under the existing certificate for any taxable year. The final
regulations, however, permit a certificate holder who refinances a
variable rate loan with either a variable rate loan or a fixed rate
loan to determine the xamount of credit that would have been allowable
by using an alternative method instead of calculating the amount based
on the actual interest that would have been paid on the refinanced
loan. Under the alternative method, the credit that would have been
allowable is computed using an amortization schedule of a hypothetical
self-amortizing loan with level payments projected to the final
maturity date of the refinanced loan. The interest rate of the
hypothetical loan is the annual percentage rate (APR) of the
refinancing loan determined for purposes of the Federal Truth in
Lending Act. The principal of the hypothetical loan is the remaining
outstanding balance of the certified mortgage indebtedness specified on
the existing certificate.
A certificate holder who refinances a variable rate loan may use
the alternative method or may compute the actual amount of credit that
would have been allowable. However, the method chosen must be
consistently applied by the holder beginning with the first taxable
year for which the tax credit based upon the reissued certificate is
claimed.
The temporary regulations do not address whether a refinancing loan
is a financing that is subject to the recapture provisions of section
143(m) if the refinanced loan was not subject to recapture. The final
regulations provide that the refinancing loan underlying a reissued
mortgage credit certificate that replaces a mortgage credit certificate
issued on or before December 31, 1990, is not a federally subsidized
indebtedness that is subject to the recapture provisions of section
143(m) of the Code.
Commentators asked for clarification of whether additional volume
cap was required in order to reissue a mortgage credit certificate and
whether additional reporting was required by the issuer of a reissued
mortgage certificate. Reissuance of a mortgage credit certificate
relates to refinancing by a mortgage credit certificate holder of a
mortgage loan on the holder's principal residence. Volume cap was
required to be obtained in connection with the program under which the
original certificate had been issued. Because the reissued certificate
is replacing the existing certificate, it is treated as issued in
connection with the original program, and additional volume cap is
unnecessary for the reissuance. For similar reasons, no additional
reporting is required by an issuer of a reissued mortgage credit
certificate.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. It also has been
determined that section 553(b) of the Administrative Procedures Act (5
U.S.C. chapter 5) does not apply to these regulations, and because the
notice of proposed rulemaking preceding the regulations was issued
prior to March 29, 1996, the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to section 7805(f) of the Internal
Revenue Code, the notice of proposed rule making preceding these
regulations was submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Drafting Information
The principal author of these regulations is L. Michael Wachtel,
Office of the Assistant Chief Counsel (Financial Institutions and
Products), IRS. However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
removing the entry for Sections 1.25-1T--1.25-8T and adding entries in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.25-1T also issued under 26 U.S.C. 25.
Section 1.25-2T also issued under 26 U.S.C. 25.
Section 1.25-3 also issued under 26 U.S.C. 25.
[[Page 66214]]
Section 1.25-3T also issued under 26 U.S.C. 25.
Section 1.25-4T also issued under 26 U.S.C. 25.
Section 1.25-5T also issued under 26 U.S.C. 25.
Section 1.25-6T also issued under 26 U.S.C. 25.
Section 1.25-7T also issued under 26 U.S.C. 25.
Section 1.25-8T also issued under 26 U.S.C. 25. * * *
Par. 2. Section 1.25-3 is added to read as follows:
Sec. 1.25-3 Qualified mortgage credit certificate.
(a) through (g)(1)(ii) [Reserved] For further guidance, see
Sec. 1.25-3T(a) through (g)(1)(ii).
(g)(1)(iii) Reissued certificate exception. See paragraph (p) of
this section for rules regarding the exception in the case of
refinancing existing mortgages.
(g)(2) through (o) [Reserved] For further guidance, see Sec. 1.25-
3T(g)(2) through (o).
(p) Reissued certificates for certain refinancings--(1) In general.
If the issuer of a qualified mortgage credit certificate reissues a
certificate in place of an existing mortgage credit certificate to the
holder of that existing certificate, the reissued certificate is
treated as satisfying the requirements of this section. The period for
which the reissued certificate is in effect begins with the date of the
refinancing (that is, the date on which interest begins accruing on the
refinancing loan).
(2) Meaning of existing certificate. For purposes of this paragraph
(p), a mortgage credit certificate is an existing certificate only if
it satisfies the requirements of this section. An existing certificate
may be the original certificate, a certificate issued to a transferee
under Sec. 1.25-3T(h)(2)(ii), or a certificate previously reissued
under this paragraph (p).
(3) Limitations on reissued certificate. An issuer may reissue a
mortgage credit certificate only if all of the following requirements
are satisfied:
(i) The reissued certificate is issued to the holder of an existing
certificate with respect to the same property to which the existing
certificate relates.
(ii) The reissued certificate entirely replaces the existing
certificate (that is, the holder cannot retain the existing certificate
with respect to any portion of the outstanding balance of the certified
mortgage indebtedness specified on the existing certificate).
(iii) The certified mortgage indebtedness specified on the reissued
certificate does not exceed the remaining outstanding balance of the
certified mortgage indebtedness specified on the existing certificate.
(iv) The reissued certificate does not increase the certificate
credit rate specified in the existing certificate.
(v) The reissued certificate does not result in an increase in the
tax credit that would otherwise have been allowable to the holder under
the existing certificate for any taxable year. The holder of a reissued
certificate determines the amount of tax credit that would otherwise
have been allowable by multiplying the interest that was scheduled to
have been paid on the refinanced loan by the certificate rate of the
existing certificate. In the case of a series of refinancings, the tax
credit that would otherwise have been allowable is determined from the
amount of interest that was scheduled to have been paid on the original
loan and the certificate rate of the original certificate.
(A) In the case of a refinanced loan that is a fixed interest rate
loan, the interest that was scheduled to be paid on the refinanced loan
is determined using the scheduled interest method described in
paragraph (p)(3)(v)(C) of this section.
(B) In the case of a refinanced loan that is not a fixed interest
rate loan, the interest that was scheduled to be paid on the refinanced
loan is determined using either the scheduled interest method described
in paragraph (p)(3)(v)(C) of this section or the hypothetical interest
method described in paragraph (p)(3)(v)(D) of this section.
(C) The scheduled interest method determines the amount of interest
for each taxable year that was scheduled to have been paid in the
taxable year based on the terms of the refinanced loan including any
changes in the interest rate that would have been required by the terms
of the refinanced loan and any payments of principal that would have
been required by the terms of the refinanced loan (other than
repayments required as a result of any refinancing of the loan).
(D) The hypothetical interest method (which is available only for
refinanced loans that are not fixed interest rate loans) determines the
amount of interest treated as having been scheduled to be paid for a
taxable year by constructing an amortization schedule for a
hypothetical self-amortizing loan with level payments. The hypothetical
loan must have a principal amount equal to the remaining outstanding
balance of the certified mortgage indebtedness specified on the
existing certificate, a maturity equal to that of the refinanced loan,
and interest equal to the annual percentage rate (APR) of the
refinancing loan that is required to be calculated for the Federal
Truth in Lending Act.
(E) A holder must consistently apply the scheduled interest method
or the hypothetical interest method for all taxable years beginning
with the first taxable year the tax credit is claimed by the holder
based upon the reissued certificate.
(4) Examples. The following examples illustrate the application of
paragraph (p)(3)(v) of this section:
Example 1. A holder of an existing certificate that meets the
requirements of this section seeks to refinance the mortgage on the
property to which the existing certificate relates. The final
payment on the holder's existing mortgage is due on December 31,
2000; the final payment on the new mortgage would not be due until
January 31, 2004. The holder requests that the issuer provide to the
holder a reissued mortgage credit certificate in place of the
existing certificate. The requested certificate would have the same
certificate credit rate as the existing certificate. For each
calendar year through the year 2000, the credit that would be
allowable to the holder with respect to the new mortgage under the
requested certificate would not exceed the credit allowable for that
year under the existing certificate. The requested certificate,
however, would allow the holder credits for the years 2001 through
2004, years for which, due to the earlier scheduled retirement of
the existing mortgage, no credit would be allowable under the
existing certificate. Under paragraph (p)(3)(v) of this section, the
issuer may not reissue the certificate as requested because, under
the existing certificate, no credit would be allowable for the years
2001 through 2004. The issuer may, however, provide a reissued
certificate that limits the amount of the credit allowable in each
year to the amount allowable under the existing certificate. Because
the existing certificate would allow no credit after December 31,
2000, the reissued certificate could expire on December 31, 2000.
Example 2. (a) The facts are the same as Example 1 except that
the existing mortgage loan has a variable rate of interest and the
refinancing loan will have a fixed rate of interest. To determine
whether the limit under paragraph (p)(3)(v) of this section is met
for any taxable year, the holder must calculate the amount of credit
that otherwise would have been allowable absent the refinancing.
This requires a determination of the amount of interest that would
have been payable on the refinanced loan for the taxable year. The
holder may determine this amount by--
(1) Applying the terms of the refinanced loan, including the
variable interest rate or rates, for the taxable year as though the
refinanced loan continued to exist; or
(2) Obtaining the amount of interest, and calculating the amount
of credit that would have been available, from the schedule of equal
payments that fully amortize a hypothetical loan with the principal
amount equal to the remaining outstanding balance of the certified
mortgage indebtedness specified
[[Page 66215]]
on the existing certificate, the interest equal to the annual
percentage rate (APR) of the refinancing loan, and the maturity
equal to that of the refinanced loan.
(b) The holder must apply the same method for each taxable year
the tax credit is claimed based upon the reissued mortgage credit
certificate.
(5) Coordination with Section 143(m)(3). A refinancing loan
underlying a reissued mortgage credit certificate that replaces a
mortgage credit certificate issued on or before December 31, 1990, is
not a federally subsidized indebtedness for the purposes of section
143(m)(3) of the Internal Revenue Code.
Sec. 1.25-3T [Amended]
Par. 3. Section 1.25-3T is amended by removing paragraphs
(g)(1)(iii) and (p).
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: November 27, 1996.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 96-31772 Filed 12-16-96; 8:45 am]
BILLING CODE 4830-01-U
