Daily Tax Update - September 15, 2009

IRS RELEASES GUIDANCE RELATING TO COMMERCIAL MORTGAGE LOANS: Today, the IRS issued three pieces of guidance relating to commercial mortgage loans held by a securitization vehicle:

1. Revenue Procedure 2009-45 describes the conditions under which modifications to certain mortgage loans will not cause the IRS to challenge the tax status of REMICs or investment trusts. A modification will not cause the IRS to challenge if all of the following factors are present:

(1) the pre-modification loan is not secured by a residence that contains fewer than five dwelling units and that is the principal residence of the issuer of the loan;

(2) If a REMIC holds the pre-modification loan, then no more than 10% of the stated principal of the total assets of the REMIC was represented by loans on which, at the time of the contribution to the REMIC, the payments on the loan were overdue by 30 days or more or a default on the loan was reasonably foreseeable; and

(3) Based on “all the facts and circumstances,” the holder or servicer “reasonably believes that there is a significant risk of default of the pre-modification loan upon maturity of the loan or at an earlier date.”  The reasonable belief must be based on a “diligent contemporaneous determination of that risk, which may take into account credible written factual representations made by the issuer if the holder or servicer “neither knows nor has reason to know that such representations are false.” In determining the significance of the risk of default, a relevant factor may be how far in advance the possible default is. This is no maximum period after which default is “per se not foreseeable.” For example, the Revenue Procedure states that a holder could reasonably believe that there is a significant risk of default even though the foreseen default is more than one year in the future. Further, although past performance is a factor in assessing risk, a holder or servicer may have a reasonable belief of risk of default even if the loan is performing; and

(4) Based on all the facts and circumstances, the holder or servicer reasonably believes that the modified loan presents a “substantially reduced risk of default, as compared with the pre-modification loan.”

2.  Final regulations under 1.860G (T.D. 9463), expanding the list of exceptions that will not be considered “significant modifications” of an obligation held by a REMIC. The final regulations incorporate comments received in response to Notice 2007-17, in which the IRS and Treasury Department requested input on whether the present REMIC regulations should be amended to permit additional types of modifications incurred in connection with commercial mortgage loans. The final regulations expand the list of loan modifications that are not considered “significant modifications” of an obligation. These new exceptions are:

• Release of a lien on real property that does not result in a significant modification under Treas. Reg. 1.1001-3, so long as the mortgage continues to be “principally secured by an interest in real property”;
• Release of a lien on real property occasioned by a default or a reasonably foreseeable default, so long as the mortgage continues to be “principally secured by an interest in real property”;
• A modification that releases, substitutes, adds, or otherwise alters a substantial amount of the collateral for, a guarantee on, or other form of credit enhancement for, a nonrecourse or nonrecourse obligation, so long as the obligation continues to be “principally secured by an interest in real property”; and
• Change in the nature of the obligation from nonrecourse (or substantially all nonrecourse) to recourse (or substantially all recourse) so long as the obligation is “principally secured by an interest in real property.”

For determining when an obligation is considered “principally secured by an interest in real property," the requirement that the fair market value of the real property that secures the obligation equal 80% of the adjusted issue price of the obligation (the “80% test”) is retained, but the final regulations add an alternative test: a modified mortgage loan continues to be principally secured by real property if the fair market value of the interest in real property that secures the loan immediately after the modification equals or exceeds the fair market value of the interest in real property that secured the loan immediately before the modification. An independent appraisal is not required: the principally-secured test will be satisfied if the servicer reasonably believes (based on a commercially reasonable valuation method) that the modified mortgage loan satisfies the 80% test or that the value of the real property collateral immediately after the modification is no less than the value of the real property collateral immediately before it.

3.  Notice 2009-79: The IRS and Treasury requested comments on what additional guidance, if any, is needed regarding modifications of commercial mortgage loans held by investment trusts.

• For additional information, contact Philip R. West – pwest@steptoe.com, Scott A. Sinder – ssinder@steptoe.com, or Amanda Varma – avarma@steptoe.com

BAUCUS DELAYS RELEASING HEALTH CARE BILL:  Senate Finance Committee Chairman Max Baucus said that “we're getting very close” to finalizing health care legislation and expects to release his Chairman's mark tomorrow. Yesterday, Baucus said, “I think there will be Republicans” who support the bill. Baucus added, “I'm not saying it's going to be on the mark. But I'm saying by the time we complete markup, there will be Republicans that will vote for it.” Baucus later said that the committee markup would begin September 22.

MISCELLANEOUS GUIDANCE ISSUED TODAY:
The Internal Revenue Service has allocated authority to issue Tribal Economic Development Bonds under the American Recovery and Reinvestment Act of 2009. In Notice 2009-51, the IRS solicited applications for the allocation of $2 billion of national bond volume limitation authority (volume cap) to issue Tribal Economic Development Bonds under section 7871(f) of the Internal Revenue Code. Section seven of the notice provides that the volume cap is to be allocated in at least two tranches, the first of which would not exceed $1 billion in total with a $30 million limitation per Indian tribal government. The IRS received 58 applications requesting a total of $1,329,487,364.88 in volume cap available under the first tranche. Pursuant to the notice, the IRS allocated pro rata amounts of volume cap to the projects described in the applications such that the total amount allocated under the first tranche did not exceed $1 billion.  For those applicants who elected to consent to public disclosure, the IRS is releasing an allocation schedule showing the names of the Indian tribal governments, the types and locations of the projects described in the applications and the amounts of the awarded allocations.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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